UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ý☒ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 30, 201829, 2019
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o☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-34851
RED ROBIN GOURMET BURGERS, INC.
(Exact name of registrant as specified in its charter)
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Delaware (State or other jurisdiction of incorporation or organization) | | 84-1573084 (I.R.S. Employer Identification No.) |
| 6312 S Fiddler’s Green Circle, Suite 200N | | |
| Greenwood Village, CO | | 80111 |
| (Address of principal executive offices) | | (Zip Code) |
(303) 846-6000
(Registrant's telephone number, including area code)
Securities Registered Pursuantregistered pursuant to Section 12(b) of the Exchange Act:
Common Stock, $0.001 par valueName of each exchange on which registered: |
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| Title of each class | | Trading symbol(s) | | Name of each exchange on which registered |
| Common Stock, $0.001 par value | | RRGB | | NASDAQ (Global Select Market) |
Securities Registered Pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | | Accelerated filer ý | | Non-accelerated filer o
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If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the voting and non-voting common stock held by non-affiliates (based on the closing price on the last business day of the registrant's most recently completed second fiscal quarter on The NASDAQ Global Select Market) was $632.8$394.2 million. All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be "affiliates" of the registrant.
There were 12,964,57712,915,148 shares of common stock outstanding as of February 25, 2019.2020.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is incorporated by reference to the registrant's definitive proxy statement for the 20192020 annual meeting of stockholders.
RED ROBIN GOURMET BURGERS, INC.
TABLE OF CONTENTS
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| PART I |
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| PART II |
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| PART III |
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| PART IV |
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PART I
ITEM 1. Business
Overview
Red Robin Gourmet Burgers, Inc., together with its subsidiaries, primarily develops, operates, franchises, and franchisesdevelops full-service restaurants in North America and focuses onfamous for serving an imaginative selection of high quality gourmetmore than two dozen craveable, high-quality burgers with Bottomless Steak Fries® in a fun environment welcoming to Guests of all ages.
We opened the first Red Robin® restaurant in Seattle, Washington in September 1969. In 1979, the first franchised Red Robin restaurant was opened in Yakima, Washington. In 2001, we formed Red Robin Gourmet Burgers, Inc., a Delaware corporation, and consummated a reorganization of the Company. Since that time, Red Robin Gourmet Burgers, Inc. has owned, either directly or indirectly, all of the outstanding capital stock or membership interests, respectively, of Red Robin International, Inc. and our other operating subsidiaries through which we operate our Company-owned restaurants. Unless otherwise provided in this Annual Report on Form 10-K, references to “Red Robin,” “we,” “us,” “our”, or the “Company” refer to Red Robin Gourmet Burgers, Inc. and our consolidated subsidiaries.
As of the end of our fiscal year on December 30, 2018,29, 2019, there were 573556 Red Robin restaurants, of which 484454 were Company-owned and 89102 were operated by franchisees. Our franchisees are independent organizations to whom we provide certain support. See “Restaurant Franchise and Licensing Arrangements” for additional information about our franchise program. As of December 30, 2018,29, 2019, there were Red Robin restaurants in 44 states and twoone Canadian provinces.province.
Financial information for our single operating segment is included in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
The Company’s fiscal year is 52 or 53 weeks ending the last Sunday of the calendar year. Fiscal year 2018 included 52 weeks, ending on December 30, 2018. Fiscal year 2017 included 53 weeks, ending on December 31, 2017. Fiscal years 2016, 2015, and 2014 each included 52 weeks, ending on December 25, 2016, December 27, 2015, and December 28, 2014. Fiscal year 2019 will include 52 weeks, ending on December 29, 2019. We refer to our fiscal years as 2020, 2019, 2018, 2017, 2016, 2015, and 20142015 throughout this Annual Report on Form 10-K. Our fiscal years, fiscal year end dates and the number of weeks in each period is summarized in the table below:
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| Fiscal Year | | Year End Date | | Number of Weeks in Fiscal Year |
| Current and Prior Fiscal Years: | | | | |
| 2019 | | December 29, 2019 | | 52 |
| 2018 | | December 30, 2018 | | 52 |
| 2017 | | December 31, 2017 | | 53 |
| 2016 | | December 25, 2016 | | 52 |
| 2015 | | December 27, 2015 | | 52 |
| Upcoming Fiscal Year: | | | | |
| 2020 | | December 27, 2020 | | 52 |
Business Strategy
Red Robin’s goalRobin is in a time of foundational change. In 2019, we evaluated our strategic position in conjunction with the third quarter appointment of Paul J.B. Murphy III as President and Chief Executive Officer and Board Director. We also appointed three new independent Directors to our Board who all have significant restaurant and turnaround experience. We commissioned comprehensive Guest-led studies during 2019 that provided data driven and actionable information on how to align the Red Robin brand to our Guest's expectations. Looking forward, we identified clear opportunities to strengthen our brand, improve our service model, and clarify our messaging. Based on the analysis of our findings, we developed a compelling plan to quickly drive improved Guest experiences, business performance, and stockholder value; our plan includes the following four fundamental elements:
Recapture our Soul.
Our brand promise is to differentiate itself from casual dining establishmentsdeliver memorable moments of connection for our Guests. We engage with our Guests by delivering and amplifying the flavor of Americana through our Gourmet Burgers and other favorite menu items, including shareable foods like our all-you-can-eat Bottomless Steak Fries®. A visit to our restaurant encourages our Guests to determine the pace of their experience based on attributestheir occasion (which we have historically and proudly referred to as “The Gift of Time”), while enjoying our most loyalfamily friendly and playful atmosphere. A visit to Red Robin encourages Guests give us credit for: Quality, Service,to connect with the people around the table, our Team Members, and Value.our brand. We believe that delivering on our brand promise will drive growth in Guest visits and brand advocacy.
Deliver the Promise.
We are accountable for consistently delivering our brand promise to our Guests. We are focused on implementing a new service model that enhances our Guest experience by increasing the functionality and hospitality levels at our restaurants. To differentiate on Quality,enable this, we offerare rationalizing our menu offerings to emphasize core product ingredient quality and product innovation, in conjunction with identifying key opportunities. We are also investing in technology; In 2019 we rolled out our server hand-held point-of-sale devices and headsets, improving both speed of service and order accuracy. In 2020, we will introduce a largenew loyalty program and varied selection of craveabledigital ordering experience, to drive incremental visits and highly customizable burgers. To differentiate on Service, our goal isadditional off-premise sales. Finally, we continue to serve foodemphasize and beverages quickly and attentively so Guests can spend more time enjoying their food and less time waiting.support Team Member engagement. We also strive to deliver competitive Value by providing abundant portions at a range of price points. Red Robinachieve best-in-class retention levels from General Manager to hourly Team Members seek toand encourage our Team Members live our B.U.R.G.E.R. values everyday: Bottomless Fun, Unwavering Integrity, Relentless Focus on Improvement, Genuine Spirit of Service, Extraordinary People, and Recognized Burger Authority.
In addition to caring for those Guests who choose to dine in at Red Robin, we are also expanding our reach to those Guests who choose to carry-out a meal, use a third-party delivery service, or cater a meeting or event. These platforms are rapidly growing Our culture fosters improved Guest satisfaction and it is our goal to move Red Robin from being a destination for dining-in to a destination and a source for dining wherever the Guests want to go.
To ensure the success of Red Robin in a rapidly evolving marketplace, we are focused on quickly turning business performance around by urgently executing the business fundamentals that include building profitable sales and delivering a consistent, high quality guest experience through exceptional operations. Our long-term strategy includes four strategic pillars:
Attract, Retain, and Engage High Performance Teams.We emphasize and support Team Member engagement, retention, and culture that will foster the development of great leaders.
Tell Our goal isStory.
We launched our "All the Fulls" omni-channel brand campaign in the third quarter of 2019, which emphasizes the emotional appeal of our brand promise of driving memorable moments of connection, and reinforces key aspects of our brand, including Americana, family friendly atmosphere, and shareable menu items. This has transformed the emphasis of our messaging from price driven to enhance clarityhighlighting the value our brand provides. We expect this to drive improved engagement with our Team Members by consistently communicating our strategy through a common playbookGuests and ensuring we remain narrowly focused on our key initiatives. We continually strive to develop extraordinary people and encourage Team Member performance through appreciation, recognition, and respect. In an effort to continue to develop leadership strength, we are focused on executing dynamic succession planning, and innovative recruiting and talent development. See “Learning and Development” below for additional information about our Team Member development initiatives.
grow restaurant traffic.Accelerate Profitable Growth
Evolve to Better Serve Middle Income Families.We actively seek to enhance Valueaccelerate profitable sales growth through selective focus on fewer and more impactful initiatives that will drive significant top and bottom-line results. We intend to grow our off-premise and catering business, which has already proven to be a balancesignificant driver of quality, quantity, price, and experience. This includes providing high quality menu items, offering new products at everyday value prices and delivering on abundance through a wide choice of bottomless sides and beverages.sales. We frequently enhance ourwill also launch Red Robin last-mile delivery in 2020, which will provide Guests the ability to utilize our unique loyalty program, “Red Robin Royalty™ program" when ordering off-premise. Further, in 2020 we announced our partnership with Donatos®, a high-quality pizza brand "nested" inside of Red Robin restaurants that we expect to drive guest traffic through frequent buyer rewards. Additionally, we are
focused on driving guest preference at any occasion by offering our products through alternate modes of access. As part of this strategy, we offer online ordering for carry-out, delivery access in the majority of our locations via multiple third party services,incremental top-line sales and catering. We are also currently testing self-delivery for potential deployment in future years.
Embrace the "Gift of Time" as a Key Differentiator. Our strategy in regaining our operational edge includes serving consistently great burgers, accurately customized,gross margin and served quickly by our caring Team Members whether the Guest choosesgive Guests another reason to dine in the restaurant or off premise. We respect our Guests’ need for the “gift of time” in an increasingly time-starved culture and remain committed to improving both speed of service and order accuracy.
Improve Company and 4-Wall Economics. We are committed to delivering stockholder value by improving profitability and investing capital wisely. Our goal is to optimize our capital structure, prudently invest in technology and restaurant development that deliver targeted returns on investment, refranchise certain restaurants, and improve our EBITDA margin through sustainable revenue growth and prudent cost management at the restaurant level and above.
choose Red Robin.Restaurant Concept
The Red Robin brand has many desirable attributes, including a range of high-quality menu items, a strong guest-focusedGuest-focused culture, and a value proposition designed to help our Guests customize their experiences.experience memorable moments connecting family, friends, and fun.
We pride ourselves on being THE Burger Authority.our Gourmet Burgers and other American Favorites served in a casual, playful atmosphere. Our menu features our signature product, a line of Gourmet Burgers which we make from premium quality, fresh ground beef. To complement our best-selling Gourmet Burgers, we offer an everyday-value line of Red’s Tavern Double® burgers, and Red Robin’s Finest line made with premium toppings. We also offer burgers made with other proteins including chicken breasts (grilled or fried), hand breaded cod and grilled salmon fillets, and turkey patties, as well as a proprietary vegetarian patty and the Impossible™ plant-based burger patty. We offer a wide selection of buns, including ciabatta, gluten free, sesame, onion, whole grain, jalapeno, and lettuce wraps, with a variety of toppings, including fresh guacamole, house-made barbeque sauces, grilled pineapple, crispy onion straws, sautéed mushrooms, fried jalapenos, bruschetta salsa, coleslaw, eight differentseveral cheese choices, and a fried egg. All of our burgers are served with our all-you-can-eat Bottomless Steak Fries® or a GuestGuests may choose from five other bottomless sides.side options. We specialize in customizing our menu items to meet our Guests’ dietary needs and preferences and have received recognition from experts in the allergyallergen community. In addition to burgers, which accounted for 54%66% of our total food and beverageentrée sales in 2018,2019, Red Robin serves an array of other itemsAmerican Favorites that appeal to a broad range of Guests. These items include a variety of shareable appetizers, salads, soups, seafood, and other entrees. We also offer a range of single-servingsingle-serve and shareable desserts as well as our classic and Finest milkshakes. Our beverages include signature alcoholic and non-alcoholic specialty drinks, cocktails, wine, and a variety of national and craft beers.
We strive to meet the needs ofgive our Guests by offering athe choice of experiences and occasionsthe pace of their experience based on their occasion, from accommodating time-pressured meals to offering a place to relax and unwindconnect with friends. Red Robin also has an unparalleled and extraordinary approach to guestGuest service, and we have cataloged thousands of stories of Red Robin Team Members who live our values. Many examples can be found on our website, www.redrobin.com.www.redrobin.com. We encourage our Team Members to execute on the aspects of service that we have identified to be the biggest drivers of our guestGuest loyalty. Note that our website and the information contained on or connected to our website are not incorporated by reference herein, and our web address is included as an inactive textual reference only.
We also strive to provide our Guests with exceptional dining value and the ability to customize their experience. In 2018,2019, we had an average check per Guest of $12.92$13.46 including beverages. We believe this price-to-value relationship, featuring our innovative array of burgers, starting at $6.99 and ranging up to $15.49, differentiates us from our casual dining competitors and allows us to appeal to a broad base of middle income, multi-generational consumers.
Operations
Restaurant Management
Our typical restaurant management team consists of a general manager, an assistant general manager, and two or three assistant managers depending on restaurant sales volumes. The management team of each restaurant is responsible for the day-to-day operation of that restaurant, including hiring, training, and coaching of Team Members, as well as operating results. Our typical restaurant employs approximately 58 hourly55 Team Members, most of whom work part-time.
part-time on an hourly basis.
Learning and Development
We strive to maintain quality and consistency in each of our restaurants through the training and supervision of Team Members and the establishment of, and adherence to, high standards relating to Team Member performance, food and beverage preparation, and the maintenance of our restaurants. Each restaurant maintains a group of certified learning coaches, including a head learning coach, who collectively are tasked with preparing new Team Members for success by providing on-the-job training leading up to a final skills certification for their position. Team Members seeking advancement have the opportunity to join our management development program as a Shift Supervisor. One of our main priorities will continue to be hire, train, and retain Team Members as we believe this is key to maintaining quality and consistency in each of our restaurants.
Shift Supervisors complete an in-depth training curriculum that develops their ability to supervise all aspects of shift execution, including, but not limited to, food safety, food production, coaching, and financial aspects of the business. The Shift Supervisor program is an important stepping stonesteppingstone for hourly Team Members who desire a career in restaurant management.
New restaurant managers participate in our eight-week Management Foundations training program. This program hones each manager’s skills, specifically in two areas: flawless shift execution and effective coaching of Team Members.
Providing our restaurant teams the support and resources they need to be successful requires dedication, an of-service attitude, and the utmost professionalism on the part of our home officerestaurant support center team. We ensure the home officerestaurant support center Team Members have what they need to meet these demands by offering several avenues to enhance their professional development, including but not limited to an in-house leadership library of over 400 titles, more than 40 on-site and 12 off-site development workshop opportunities, as well as one-on-one coaching.
Food Safety and Purchasing
Our food safety and quality assurance programs help manage our commitment to quality ingredients and food preparation. Our systems are designed to protect our food supply from product receipt through preparation and service. We provide detailed specifications for our food ingredients, products, and supplies to our suppliers. We qualify and audit our key manufacturers and growers and require their certification under the Global Food Safety Initiative. Our restaurant managers are certified in a comprehensive safety and sanitation course by the National Restaurant Association’s ServSafe program. Minimum cooking requirements, specifically safe handling, cooling procedures, and frequent temperature and quality checks, exist forensure the safety and quality of allthe food we serve in our restaurants. In order to provide the freshest ingredients and products and to maximize operating efficiencies between purchase and usage, each restaurant’s management team determines the restaurant’s daily usage requirements for food ingredients, products, and supplies, and accordingly, orders from approved suppliers, and distributors. The restaurant management team inspects deliveries to ensure that the products received meet our safety and quality specifications. Additionally, we utilize the services ofengage an independent auditing company to perform unannounced comprehensive food safety and sanitation inspections up to four times a year in all Company-owned and franchised restaurants.
To maximize our purchasing efficiencies and obtain the best possible prices for our high-quality ingredients, products, and supplies, our centralized purchasing team negotiates supply agreements whichthat may include fixed price contracts that can vary in term, lengths or formula-based pricing agreements whichthat can fluctuate on changes in raw material commodity pricing. Of our total cost of goods in 2018, potatoes2019, ground beef represented approximately 14%, ground beefpotatoes represented approximately 13%, and poultry represented approximately 10%9%. We monitor the market for the primary commodities we purchase and extend contract positions when applicable in order to minimize the impact of fluctuations in price and availability. However, certain commodities, primarily cheese, potatoes, and ground beef remain subject to market price fluctuations. We continue to identify competitively priced, high quality alternative manufacturers, suppliers, growers, and distributors that are available should the need arise; however, to date we have not experienced significant disruptions in our supply chain. As of December 30, 2018,29, 2019, approximately 62.3%60% of our estimated annual food and beverage purchases were covered by fixed price contracts, most of which are scheduled to expire at various times through the end of 2019.2021.
Restaurant Development
Red Robin has grown its restaurant base prudently, considering a number of factors, including general economic conditions, expected financial performance, availability of appropriate locations, competition in local markets, and the availability of teams to manage new locations. Our site selection criteria focuses on identifying markets, trade areas, and specific sites that are likely to yield the greatest density of desirable demographic characteristics, retail traffic, and visibility. During 2018,Based on these factors, we opened eight Company-owned restaurants.paused on new corporate growth in 2019. Over the past three years, we have opened a total of 5226 new restaurants, acquired 13 franchisedincluding one relocated restaurant.
In 2020, we announced our partnership with Donatos®, a high-quality pizza brand "nested" inside of Red Robin restaurants. Through this partnership, our restaurants will prepare and relocated four restaurants.
serve Donatos® branded pizzas to our dine in and off-premise Guests. Pursuant to a licensing arrangement, we will pay royalties on sales of Donatos® pizza products to Donatos®. We plan to introduce Donatos® pizzas to approximately 100 restaurants in 2020 and 150 restaurants in both 2021 and 2022.
During 2019,2020, we will continue to execute our long termlong-term growth strategy which includes pausing on new corporate growth as we will carefully address our changing guest base, opportunities to broaden our reach and execute sustainable growth initiatives that deliver value to our stockholders. The Company is not expecting to open any new restaurants during 2020, but we will continue to invest money in restaurant refreshes and remodels under a new restaurant prototype to better meet the dine-in and off-premise needs of our Guests.
Restaurant Franchise and Licensing Arrangements
As of December 30, 2018,29, 2019, our franchisees operated 89102 restaurants in 16 states.states and British Columbia, Canada. Our two largest franchisees own 43 restaurants located in Michigan, Ohio, and easternEastern and centralCentral Pennsylvania. In 2018, certain2019, franchisees opened threeone new restaurantsrestaurant based on new area development agreements executed in 2017.2017 and acquired 12 restaurants from corporate. We expect our franchisees will open one new unitsrestaurant in 2019 and anticipate franchise unit growth to continue as our franchisees complete required investments to bring existing restaurants to our current brand and design standards.2020. We are identifying additional franchise opportunities to grow our franchise base through existing and new franchisees based on markets of interest.
Franchise Compliance Assurance
We actively work with and monitor our franchisees’ performance to help them develop and operate their restaurants in compliance with Red Robin’s standards, systems, and procedures. During the restaurant development phase, we review the franchisee’s site selection and provide the franchisee with our prototype building plans. We provide trainers to assist the franchisee in opening the restaurant for business. We advise the franchisee on all menu items, management training, and equipment and food purchases.
To continuously improve our marketing programs and operating systems, we maintain a franchise advisory board consisting of franchisee members that meet with the corporate executive team. Through this advisory board, we solicit the input of our franchisees on marketing programs, including their suggestions as to which new menu items we should test and feature in future promotions. We also exchange best operating practices with our franchisees as we strive to improve our operating systems while attaining a high level of franchisee participation.
Information Technology
We rely on information systems in all aspects of our operations, including, but not limited to, point-of-sale transaction processing in our restaurants; operation of our restaurants; management of our inventories; collection of cash; payment of payroll and other obligations; and various other processes and procedures.
Our corporate officesrestaurant support center and Company-owned restaurants are enabled with information technology and decision support systems. In our restaurants, these systems are designed to provide operational tools for sales, inventory, and labor management. This technology includes industry-specific, off-the-shelf systems, as well as proprietary software such as tools designed to optimize food and beverage costs and labor costs. These systems are integrated with our point-of-sale systems to provide daily, weekly, and period-to-date information that is important for managers to run an efficient and effective restaurant. We also use other systems to interact with our Guests. These include online and in-restaurant guestGuest feedback systems, which provide real-time results on guestGuest service, food quality, and atmosphere to each of our restaurants.
We utilize centralized financial, accounting, and human resources/personnelresources management systems forto support our Company-owned restaurants. In addition, we use an operations scorecard whichthat integrates data from our centralized systems and distributes information to assist in managing our restaurants. We believe these combined tools are important in analyzing and improving our operations, profit margins, and other results.
In 2018,2019, we invested in technologiesconnectivity and data infrastructure that modernized and upgraded the capacity of our restaurant systems, upgraded ourdeployed hand-held point-of-sale devices systemwide, and inventory management systems, and improved flexibility of business operations. We also begancontinued work to provide our Guests with improvedon new, Guest facing digital experiences that support in-restaurant and off-premise dining. In 20192020 we plan to continue our investments in building innovative digital experiences for our Guests and to improve our ability to manage our technology infrastructure through investments in connectivity, automation, and advanced monitoring.
We accept electronic payment cards from our Guests for payment in our restaurants. We also receive and maintain certain personal information about our Guests and Team Members. We have systems and processes in place that focus on the protection of our Guests’ credit card information and other private information we are required to protect, such as our Team Members’ personal information. We have taken a number of steps to prevent the occurrence of security breaches in this respect.
Our systems have been carefully designed and configured to protect against data loss or compromise. For example, because of the number of credit card transactions processed in our Company-owned stores,restaurants, we are required to maintain the highest level of Payment Card Industry (“PCI”) Data Security Standard compliance at our corporate officesrestaurant support center and Company-owned restaurants.
These standards, set by a consortium of the major credit card companies, require certain levels of system security and procedures to protect our customers’ credit card and other personal information.
We also engage security assessors and consultants to review and advise us on our other data security practices with respect to protection of other sensitive personal information that we obtain from Guests and Team Members.
Marketing and Advertising
We build brand equity and awareness primarily through national marketing, includingan omni-channel media strategy with tailored content by channel. We leverage national television, digital media (including search, website and paid digital), social media, programs, email, loyalty, and public relations initiatives. These programs are funded primarily through cooperative creative development and national media advertising funds.
In recent years, we have undertaken significant market research initiatives to gain feedback and perceptions in order to inform our business decisions. Among other things, we use a guestGuest satisfaction tool in all restaurants that provides feedback from Guests on their experiences. Restaurant managers use this information to help identify areas of focus to strengthen restaurant performance and track progress. We also continually monitor our performance relative to peers and test potential business drivers among both current and potential Guests. We closely track the frequency and purchase behavior of Guests who are members of our Red Robin RoyaltyTM loyalty program.
In 2016,2019, we launched our marketing strategy began to shift toward a concentrated, rather than continuous, media buying approachnew brand campaign, “All the Fulls”, which is rooted in consumer insights and highlights our distinctive positioning and emotional connection with a focus on generating significant reach and frequency during on-air advertising periods.Guests. We plan to continue withfeaturing this concentrated marketing approachnew campaign across multiple media channels in 2019, while communicating a clear message focused on craveable burgers, affordable abundance, and attentive service across a variety of advertising media.2020. We will also deploycontinue marketing support for our alternative platforms initiative, including generating Guest awareness of our online ordering, to-go,growing off-premise business which includes catering, carryout and catering dining opportunities.delivery.
Team Members
As of December 30, 2018,29, 2019, we had 27,28324,586 employees, whom we refer to as Team Members, consisting of 26,93524,228 Team Members at Company-owned restaurants and 348358 Team Members at our corporate headquarters and field offices. We are currently 98% staffed at the restaurant manager level, and our restaurant Team Member turnover rate is approaching industry best-in-class targets. None of our Team Members are covered by a collective bargaining agreement. We consider our Team Member relations to be good.
We support our Team Members by offering competitive wages and benefits for eligible Team Members, including medical and other insurance, an employee stock purchase plan, and equity-based awards for eligible corporate and operations employees at the director level and above. We motivate and develop our Team Members by providing them with opportunities for increased responsibilities and advancement. At certain levels, we also offer performance-based incentives tied to sales, profitability, and/or certain qualitative measures.
Executive Officers
The following table sets forth information about our executive officers and other key employees:
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| Name | | Age | | Position |
Denny Marie PostPaul Murphy | | 61 |
65 | | President and Chief Executive Officer(1) |
Beverly K. Carmichael | | 60 |
| | Executive Vice President and Chief People, Culture, and Resource Officer |
Guy J. Constant | | 54 |
| | Executive Vice President and Chief Operating Officer |
| Jonathan Muhtar | | 47 |
48 | | Executive Vice President and Chief Concept Officer |
| Lynn S. Schweinfurth | | 51 |
52 | | Executive Vice President and Chief Financial Officer |
| Michael Buchmeier | | 56 | | Senior Vice President, Chief People Officer, and Interim Chief Operating Officer |
| Dean Cookson | | 49 |
50 | | Senior Vice President and Chief Information Officer |
| Michael L. Kaplan | | 50 |
51 | | Senior Vice President and Chief Legal Officer |
(1) Also a member of the Company’s board of directors.
Denny Marie Post.Paul Murphy. Ms. Post was appointedMr. Murphy joined Red Robin as President and Chief Executive Officer in August 2016, andOctober 2019. Mr. Murphy has served as President since February 2016. In addition, Ms. PostExecutive Chairman of Noodles & Company from July 2017. Prior to that, Mr. Murphy served as our interim Chief Operating Officer between September 2018CEO and January 2019, whena member of the board of directors of Del Taco Restaurants, Inc. from February 2009 to July 2017, and as President from February 2009 to December 2016. From 1996 to 2008, Mr. Constant became our Chief Operating Officer. Ms. Post previously served the Company inMurphy held various roles as its Executive Vice President and Chief Concept Officer, and Senior Vice President and Chief Marketing Officer. Before joining Red Robin, she was the Managing Member of mm&i Consulting LLC, a marketing consulting firm, from June 2010 to July 2011. Ms. Post servedwith Einstein Noah Restaurant Group, Inc. Mr. Murphy originally joined Einstein’s as Senior Vice President, Chief Marketing Officer of T-Mobile USA from July 2008Operations in 1997. He was promoted to May 2010, as Senior Vice President, Global Beverage, Food, and Quality at Starbucks Corporation from February 2007 to June 2008, as
Senior Vice President, Chief Concept Officer of Burger King Corp. from April 2004 to January 2007, and prior to that, in various marketing executive roles at YUM! Brands, Inc. from 1996 to 2004.
Beverly K. Carmichael. Ms. Carmichael has served as Executive Vice President, Operations in 1998, and Chief People, Culture, and Resource Officer since December 2017. Ms. Carmichael previously served as Senior Vice President and Chief People Officer of Cracker Barrel Old Country Store from January 2014 to December 2017. Prior to that, she was Founder and President of Star HR, LLC from April 2010 to April 2014. She served as Chief People Officer and Executive Vice President of Human Resources at Ticketmaster from August 2006 to August 2009. Prior to joining Ticketmaster, she was Vice President of HR at Rockwell Collins and spent 10 years at Southwest Airlines in various roles including Senior Vice President of Labor and Employee Relations; Vice President, People (Human Resources); and Chief Counsel, Labor and Employment.
Guy J. Constant. Mr. Constant became Executive Vice President and Chief Operating Officer in January 2019, and previously served as Executive Vice2002. In 2003, he was appointed President and Chief Financial Officer since December 2016. Before joining Red Robin,
CEO and a member of the board of directors. Mr. Constant previously served as Chief Financial Officer, Executive Vice President of FinanceMurphy has significant experience in both operational and Treasurer of Rent-A-Center, Inc. from June 2014 to December 2016. Prior to that, Mr. Constant wasexecutive leadership in the Chief Financial Officer and Executive Vice President of Brinker International Inc. from September 2010 to March 2014. At Brinker, he also served as Senior Vice President of Finance from May 2008 to September 2010, Vice President of Strategic Planning and Analysis and Investor Relations from September 2005 to May 2008, and Senior Director of Compensation from November 2004 to September 2005. Prior to Brinker, he spent nine years at AMR Corporation, the parent company of American Airlines, in various finance positions of increasing scope and responsibility. Mr. Constant transitioned into the role of Executive Vice President and Chief Operating Officer upon the hiring of Lynn S. Schweinfurth as the Company’s Executive Vice President and Chief Financial Officer, effective as of January 28, 2019.restaurant industry, including leading companies through successful business transformations.
Jonathan Muhtar. Mr. Muhtar was promoted to Executive Vice President and Chief Concept Officer of the Company, effective January 1, 2018. Mr. Muhtar previously served the Company as Senior Vice President and Chief Marketing Officer from December 2015 until his promotion. Prior to joining the Company, Mr. Muhtar served as Executive Vice President and Chief Marketing Officer of Captain D’s Seafood Restaurant from November 2011 to December 2015, and as Vice President of Global Marketing and Innovation and in other corporate and marketing positions at Burger King Corporation from July 2004 to June 2011.
Lynn S. Schweinfurth. Ms. Schweinfurth joined Red Robin as Executive Vice President and Chief Financial Officer in January 2019. Ms. Schweinfurth previously served as Vice President, Chief Financial Officer and Treasurer of Fiesta Restaurant Group since 2012 and was appointed Senior Vice President of Fiesta Restaurant Group in February 2015. From 2010 to 2012, she served as Vice President of Finance and Treasurer of Winn-Dixie Stores, Inc. Ms. Schweinfurth was Chief Financial Officer of Lone Star Steakhouse and Texas Land & Cattle from 2009 to 2010. She was Vice President, Finance, at Brinker International, Inc. from 2004 to 2009. Prior to 2004, Ms. Schweinfurth served in various corporate finance positions at Yum Brands, Inc. and PepsiCo, Inc.
Michael Buchmeier. Mr. Buchmeier rejoined Red Robin in 2008 as a Regional Operations Director. He had been promoted to positions of increasing responsibility in restaurant operations, including VP, Operations Standards and Talent, and eventually to Red Robin’s interim Chief People Officer before being appointed to the Senior Vice President and Chief People Officer position permanently in 2019. He had previously been a member of the Red Robin team from 1986 to 1996 as a Director of Operations prior to branching out to serve in leadership positions at other companies and to own and operate another restaurant concept. Upon the departure of Guy Constant, former Chief Operating Officer, in January 2020, Mr. Buchmeier assumed the role of interim Chief Operating Officer until the Company finds a permanent Team Member for the position.
Dean Cookson. Mr. Cookson joined Red Robin as Senior Vice President and Chief Information Officer in September 2017. Prior to joining Red Robin, Mr. Cookson served as Vice President and Chief Technology Officer of Virgin America Inc. from February 2011 to January 2017. He served as Vice President of Business Development at Basho Technologies, Inc. from April 2010 to February 2011. Prior to joining Basho, he served as Chief of Operations for Snapfish from June 2009 to April 2010. He also served as VP of Systems and Support Operations at Snapfish from February 2007 to June 2009. Prior to joining Snapfish, he served as Director of Production Operations at LookSmart Group, Inc. from 2002 to 2007.
Michael L. Kaplan. Mr. Kaplan joined Red Robin as Senior Vice President, Chief Legal Officer and Secretary in October 2013. Prior to joining the Company, he served as Senior Vice President, General Counsel, Chief Security Officer and Corporate Secretary of DAE Aviation Holdings, Inc. (d/b/a Standard Aero), a privately held global aviation maintenance company, from January 2010 to September 2013, and as a Shareholder at Greenberg Traurig, LLP, an international law firm, from January 2002 to January 2010.
Competition
The restaurant industry is highly competitive, and our Guests may choose to purchase food at supermarkets or other food retailers. Although, for some occasions, we compete against other segments of the restaurant industry, including quick-service and fast-casual restaurants, our primary competition is with other sit-down, casual dining restaurants within the casual dining segment. In addition, we compete to attract Guests for off-premise dining occasions, including online ordering, delivery, to-go, and catering. The number, size, and strength of competitors vary by region, concept, market, and even restaurant. We compete on the basis of taste, quality, price of food and related guestGuest value, guestGuest service, ambiance, location, and overall dining experience.
We believe our guestGuest demographics, strong brand recognition, gourmet burger concept, family-friendlyfamily friendly atmosphere, attractive price-value relationship, and the quality of our food and service enable us to differentiate ourselves from our full servicefull-service competitors. We believe we compete favorably with respect to each of these factors. Our competitors include well-established national chains which have more substantial marketing resources. We also compete with many other restaurant and retail establishments for team members.Team Members.
Seasonality
Our business is subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the summer months and winter holiday season due to factors including our retail-oriented locations and family appeal. As a result, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly as a result of seasonality. 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, and comparable restaurant sales for any particular future period may decrease.
Trademarks
We have a number of registered trademarks and service marks, including the Red Robin®, Red Robin Gourmet Burgers®, Red Robin America’s Gourmet Burgers & Spirits®, Red Robin Burger Works®, “YUMMM®”, Red Robin Gourmet Burgers and BrewsTM, and Red Robin RoyaltyTM names and logos. We have registered or filed applications for trademarks for these marks, among others, with the United States Patent and Trademark Office, and we have applied to register various trademarks in certain other international jurisdictions. Pursuant to our licensing arrangement with Donatos®, we license the right to use the Donatos® trademark.
In order to better protect our brand, we have also registered the Internet domain name www.redrobin.com. We believe our trademarks, service marks, and other intellectual property rights have significant value and are important to our brand building efforts and the marketing of our restaurant concept.
Government Regulation
Our restaurants are subject to licensing and regulation by state, province, and local health, safety, fire, and other authorities, including licensing requirements, and regulations for the sale of alcoholic beverages and food. To date, we have been able to obtain and maintain all necessary licenses, permits, and approvals. The development and construction of new restaurants is subject also to compliance with applicable zoning, land use, and environmental regulations. We are also subject to federal regulation and state laws that regulate the offer and sale of franchises and substantive aspects of the franchisor-franchisee relationship. Various federal and state labor laws govern our relationship with our Team Members and affect operating costs. These laws govern minimum wage requirements, overtime pay, meal and rest breaks, unemployment tax rates, health care and benefits, workers’ compensation rates, citizenship or residency requirements, child labor regulations, and discriminatory conduct. Federal, state, and local government agencies have established or are in the process of establishing regulations requiring that we disclose to our Guests nutritional information regarding the items we serve.
Available Information
We maintain a link to investor relations information on our website, www.redrobin.com, where we make available, free of charge, our Securities and Exchange Commission (“SEC”) filings, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. All SEC filings are also available at the SEC’s website at www.sec.gov. Our website and the information contained on or connected to our website are not incorporated by reference herein, and our web address is included as an inactive textual reference only.
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 Exchange Act. This statement is included for purposes of complying with the safe harbor provisions of the PSLRA. 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. Certain forward-looking statements are included in this Annual Report on Form 10-K, principally in the sections captioned “Business,” “Legal Proceedings,” “Consolidated Financial
Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements relate to, among other things:
our business objectives and strategic plans, including growth in guestGuest traffic and revenue, improvements in operational efficiencies, gross margins, and expense management, enhancing our restaurant environments and guest engagement, expanding our restaurant base, and designing, testing, and implementing restaurant development activities;Guest engagement;
our ability to grow our average check and increase sales of incremental items;
our focus on attracting new Guests while retaining loyal Guestsability to hire, train and our initiatives targeted at adult Guests as our restaurant concept evolves;retain Team Members, especially General Managers;
our ability to grow sales through menu rationalization and service enhancement;
our pricing strategy and any future price increases and their effect on guestGuest traffic and ordering choices, and, as a result, our revenue and profit;
the timing and cost of our investment and implementation of improvements in our information technology systems and data infrastructure to support guestGuest service and engagement and the digital guestGuest experience, and anticipated related benefits;
anticipated Company growth and the development strategy, including the anticipated number and type of a new restaurants, and the timing of such openings;restaurant prototype;
anticipated restaurant operating costs, including commodity and food prices, labor and energy costs, and selling, general, and administrative expenses, as well as the effect of inflation on such costs and our ability to reduce overhead costs and improve efficiencies;
anticipated legislation and other regulation of our business, including minimum wage standards;
our brand transformation initiatives, including the anticipated number and timing of restaurant remodels, and expected financial performance of remodeled restaurants;
developing, testing, and implementing more recent initiatives, such as changes to our service model, our partnership with Donato's®, online ordering services, third-party and last mile delivery services, utilizing an offsite call center to handle to-go orders, developing new to-go packaging, and catering services, and addressing operating issuesoperational challenges associated with these initiatives;
the amount of future capital expenditures in 2019;expenditures;
our expectation that we will have adequate cash from operations and credit facility borrowings to meet all future debt service, capital expenditures, and working capital requirements in 2019 and beyond;requirements;
anticipated retention of future cash flows to fund our operations and expansion of our business, to fund growth opportunities, to pay down debt, or to repurchase stock;
the sufficiency of the supply of our food, supplies, and labor pool to carry on our business;
our franchise program, franchisee new restaurant openings, andrefreshes, remodels, potential expansion and other changes to our franchise program, and refranchising efforts;program;
the continuation of our share repurchase program, and other capital deployment opportunities;
expectations regarding our operations in Canada and the resulting currency fluctuation risk related thereto;
expectations about any future interest rate swap;
the effect of the adoption of new accounting standards on our financial and accounting systems and analysis programs;
expectations regarding our taxes, including anticipated tax credits and net operating loss carryforwards;
expectations regarding the discontinuance of LIBOR and its effect on our credit facility;
expectations regarding competition and our competitive advantages against our casual dining peers; and
expectations regarding consumer preferences and consumer discretionary spending.spending; and
statements under the heading "2020 Outlook and Beyond"
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 Critical Accounting Policies and Estimates and Risk Factors, as well as other possible factors not listed, could cause actual results to differ materially from those expressed in forward-looking statements, including, without limitation, the following: the effectiveness of ourthe Company’s strategic businessinitiatives, including alternative labor models, service, and operational improvement initiatives,initiatives; the ability to train and retain the Company’s workforce for service execution, including the complexities related to growth of multiple revenue streams within the restaurants; the effectiveness of our affordability, service improvement, technology, and off-site initiatives to drive traffic and sales; the effectiveness of ourCompany’s marketing strategies and promotionspromotions; menu changes, including the anticipated sales growth, costs, and timing of the Donatos® expansion; the implementation and rollout of new technology solutions in the restaurants and timing thereof; the ability to increase off-premise sales; the ability to achieve restaurant sales growth;revenue and cost savings from these and other initiatives; the Company’s franchise strategy; competition in the casual dining market and discounting by competitors; the cost and availability of key food products, distribution, labor, and energy; general economic conditions; the cost and availability of capital or credit facility borrowings; the adequacy of cash flows or available debt resources to fund operations and growth opportunities; limitations on our ability to effectively useexecute stock repurchases at all or at the times or in the amounts we currently anticipate or to achieve anticipated benefits of a share repurchase program; the impact of the Company’s adoption of a shareholder rights plan; the impact of federal, state, and monitor social media; uncertainty regarding general economic conditions;local regulation of the Company’s business; concentration of restaurants in certain markets, and lack of market awareness in new markets; changes in consumer disposable income; consumer spending trends and habits; the effectiveness of our information technology and new technology systems, including cyber security with respect to those systems; regional mall and lifestyle center traffic trends or other trends
affecting traffic at our restaurants; increased competition and discounting in the casual dining restaurant market; costs and availability of food and beverage inventory; changes in commodity prices, particularly ground beef; changes in energy and labor costs, including due to changes in health care, and market wage levels; the success of our refranchising efforts; changes in federal, state, or local laws and regulations affecting the operation of our restaurants, including but not limited to, minimum wages, consumer health and safety, health insurance coverage, nutritional disclosures, and employment eligibility-related documentation requirements; limitations on our ability to execute stock repurchases at all or at the times or in the amounts we currently anticipate due to lack of available share or acceptable stock price levels or other market or Company-specific conditions, or to otherwise achieve anticipated benefits of a share repurchase program; our ability to attract qualified managers and team members; the adequacy of cash flows or available access to capital or debit resources under our credit facility or otherwise to fund operations and growth opportunities; costs and other effects of legal claims by team members,Team Members, franchisees, customers, vendors, stockholders, and others, including settlement of those claims or negative publicity regarding food safety or cyber security; weather conditions, and related events in regions where our restaurants are operated; and changes in accounting standards policies, and practices or related interpretations by auditors or regulatory entities.
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.
ITEM 1A. Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully read and consider the risks described below before making an investment decision. The occurrence of any of the following risks could materially harm our business, financial condition, results of operations, or cash flows. The trading price or value of our common stock could decline, and you could lose all or part of your investment. When making an investment decision with respect to our common stock, you should also refer to the other information contained or incorporated by reference in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes.
Risks Related to Our Business
Our business strategy may not be successful or achieve the desired results, which may have an adverse impact on our business and financial results.
Our business strategy is designed to allow Red Robin to achieve successdeliver long-term value creation for stockholders in a rapidly evolving marketplace. Our turnaround strategy focuses on attracting, retaining,recapturing and engaging high performance teams, evolvingdelivering on our brand promise through a new service model, continuing to better serve middle income families, embracing the "giftembrace "The Gift of time"Time” as a key differentiator, technology solutions, and improving companystaffing and 4-wall economics.retention; telling our story through a new creative strategy and marketing initiatives; and accelerating profitable growth through off premise sales, menu rationalization and enhancement including the introduction of Donatos® pizza, and a new restaurant prototype for future development.
Additional initiatives supporting our strategy include online ordering services, using an offsite call center to receive to-go orders, catering services,These strategies and delivery of orders directly or through third parties. These initiatives may not result in sustained higher sales. We may face delays or difficulties in implementing our new service model, and it may not achieve the service enhancements we expect, which may negatively affect Guest traffic and sales. Catering, online ordering, and other out-of-restaurant sales options also involve additional operating procedures and complexity for our restaurants and increase reliance on third parties. We may not successfully execute these procedures and are not in control of the experience provided by third parties, which could adversely impact the guestGuest experience and, as a result, harm guestGuest perception of our brand and sales. Our business and successful turnaround depends upon our ability to continue to grow and evolve through various important strategic initiatives. There can be no assurance we will be able to develop or implement these or other important strategic initiatives, or that we have, or will have, sufficient resources to fully and successfully implement, sustain results from, or achieve additional expected benefits from them, which could in turn adversely affect our business.
Our success depends on our ability to effectively compete in the restaurant industry to attract and retain Guests.
Competition in the restaurant industry is intense and barriers to entry are low. Our competitors include a large and diverse group of restaurants in all segments ranging from quick serve and fast casual to polished casual and those verging on fine dining. These competitors range from independent local operators that have opened restaurants in various markets, high growth targeted “better” burger concepts in the quick serve and fast casual space, to the well-capitalized national restaurant companies. Many of these concepts have already captured segments of the market that we are targeting, such as adult-only occasions, and are expanding faster than we are, penetrating both desirable geographic and demographic markets. Many of our competitors are well established in the casual dining market segment and in certain geographic locations and some of our competitors have substantially greater financial, marketing, and other resources than we have available. Accordingly, they may be better equipped than us to increase marketing or to take other measures to maintain their competitive position, including the use of
significant discount offers to attract Guests. We also compete with other restaurants and retail establishments for real estate and attractive locations.
Our marketing and branding strategies to attract, engage, and retain our Guests may not be successful, which could negatively affect our business.
We continue to evolve our marketing and branding strategies in order to appeal to customers and compete effectively to attract, engage, and retain customers. Our unique loyalty program, “Red Robin Royalty™” has experienced some success in enrollment and driving sales and guestGuest counts by providing loyal Guests with various incentives and rewards. We intend to continue to provide a family friendly atmosphere and have recently shifted our marketing focus on serving families while targeting adult occasions,to reinforce moments of connection and brand equities instead of price to grow beveragedrive Guest engagement, traffic and food sales, including alcoholic beverages, appetizers and desserts, through menu and service enhancements.sales. We do not have any assurance our marketing strategies will be successful. If our advertising, branding, and other marketing programs and methods are not successful, we may not generate the level of restaurant sales or guestGuest traffic we expect, and the expense associated with these programs may negatively affect our financial results. Moreover, many of our competitors have larger marketing resources and more extensive national marketing strategies and media usage and we may not be able to successfully compete against those established programs.
Our inability to effectively use and monitor social media could harm our marketing efforts as well as our reputation, which could negatively impact our restaurant sales and financial performance.
As part of our marketing efforts, we rely on search engine marketingomni-channel creative strategy including increased social and social mediadigital engagement platforms, such asincluding Facebook®, Instagram®, and Twitter® to attract and retain Guests. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal. Many of our competitors are expanding their use of social media and new social media platforms are rapidly being developed, potentially making more traditional social media platforms obsolete and making it challenging for us to differentiate our social media messaging. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal.
Social media can be challenging because it provides consumers, employees, and others with the ability to communicate approval or displeasure with a business, in near real time, and provides any individual with the ability to reach a broad audience and with comments that are often not filtered or checked for accuracy. If we are unable to quickly and effectively respond, any negative publicity could "go viral"“go viral” causing nearly immediate and potentially significant harm to our brand and reputation, whether or not factually accurate. In addition, social media can facilitate the improper disclosure of proprietary information, exposure of personally identifiable information, fraud, or out-of-date information.
As a result, if we do not appropriately manage our social media strategies, our marketing efforts in this area may not be successful and any failure (or perceived failure) to effectively respond to negative or potentially damaging social media chatter, whether accurate or not, could damage our reputation, negatively impacting our restaurant sales and financial performance. The inappropriate use of social media vehicles by our Guests or Team Members could increase our costs, lead to litigation, or result in negative publicity that could damage our reputation.
A privacy or security breach involving our information technology systems, or the failure of our data security measures could interrupt our business, damage our reputation, and negatively affect our operations and profits.
The protection of customer, employee and company data is critical to us. We are subject to laws relating to information security, privacy, cashless payments, consumer credit, and fraud. Additionally, an increasing number of government and industry groups have established laws and standards for the protection of personal and health information. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements.requirements including the recently enacted California Consumer Privacy Act (CCPA). Compliance with these requirements may result in cost increases due to necessary system changes and the development of new administrative processes, and if we fail to comply with the laws and regulations regarding privacy and security, we could be exposed to risks of fines, investigations, litigation and disruption of our operations.
Moreover, we accept electronic payment cards from our Guests for payment in our restaurants. In the ordinary course of our business, we receive and maintain certain personal information from our Guests, Team Members, and vendors, and we process guestGuest payments using payment information. Customers and employees have a high expectation we will adequately protect their personal information. Third parties may have the technology or know-how to breach the security of this customer information, and our security measures and those of our technology vendors may not effectively prohibit others from obtaining improper access to this information. A number of restaurant operators and retailers have experienced security breaches in which credit and debit card information may have been stolen. Although we employ security technologies and practices and have taken other steps to try to prevent a breach, we may nevertheless not have the resources or technical sophistication to prevent rapidly evolving types of cyber attacks.cyber-attacks. If we have experienced, or in the future experience, a security breach, we could become subject to claims, lawsuits, or other proceedings for purportedly fraudulent transactions arising out of the theft of credit or debit
card information, compromised security and information systems, failure of our employees to comply with applicable laws, the unauthorized acquisition or use of such information by third parties, or other similar claims. Any such incidents or proceedings could disrupt the operation of our restaurants, adversely affect our reputation, guestGuest confidence, and our results of operations, or result in the imposition of penalties or cause us to incur significant unplanned losses and expenditures, including those necessary to remediate any damage to persons whose personal information may have been compromised. Although we have established a consumer cyber security “bill of rights” for our Guests, which includes a number of procedures designed to increase transparency and address our guests’Guests’ concerns regarding data breaches (whether actual or perceived), this policy may not be effective in addressing those concerns, which may in turn adversely affect our reputation and guestGuest confidence. We maintain a separate insurance policy covering cyber security risks and such insurance coverage may, subject to policy terms and conditions, cover certain aspects of cyber risks, but is subject to a retention amount and may not be applicable to a particular incident or otherwise may be insufficient to cover all our losses beyond any retention. Further, in light of recent court rulings and amendments to policy forms, there is uncertainty as to whether traditional commercial general liability policies will be construed to cover the expenses related to a cyber attackcyber-attack and breaches if credit and debit card information is stolen.
Because of the number of credit card transactions we process, we are required to maintain the highest level of PCI Data Security Standard compliance at our corporate officesrestaurant support center and Company-owned restaurants. As part of an overall security program and to meet PCI standards, we undergo regular external vulnerability scans and we are reviewed by a third-party
assessor. As PCI standards change, we may be required to implement additional security measures. If we do not maintain the required level of PCI compliance, we could be subject to costly fines or additional fees from the card brands that we accept or lose our ability to accept those payment cards. Our franchisees are separate businesses that have different levels of compliance required depending on the number of credit card transactions processed. If our franchisees fail to maintain the appropriate level of PCI compliance or they experience a security breach, it could negatively impact their business operations, and we could face a loss of or reduction in royalties or other payments they are required to remit to us and it could adversely affect our reputation and guestGuest confidence.
Changes in consumer preferences could negatively affect our results of operations.
The restaurant industry is characterized by the continual introduction of new concepts and is subject to rapidly changing consumer preferences, tastes, and eating and purchasing habits. Our restaurants compete on the basis of a varied menu and feature burgers, salads, soups, appetizers, other entrees, desserts, and our signature alcoholic and non-alcoholic beverages, and we are in the process of rolling out Donatos® pizza to our restaurants, in a family-friendlyfamily friendly atmosphere. Our continued success depends, in part, upon the continued popularity of these foods and this style of casual dining. Shifts in consumer preferences away from this cuisine or dining style could have a material adverse effect on our future profitability. In addition, competitors’ use of significant advertising and food discounting could influence our guests’Guests’ dining choices. One of our strategies is to provide a balance of both family-friendly and adult-focused guest experiences. There is no assurance this balance will be successful or that itthe addition of Donatos® pizza to our menu will not negatively affectimpact our family guest experience.brand or cannibalize sales of core menu items.
Further, changing health or dietary preferences may cause consumers to avoid our products in favor of alternative foods. The food service industry as a whole rests on consumer preferences and demographic trends at the local, regional, national, and internationalnational levels, and the effect on consumer eating habits of new information regarding diet, nutrition, and health. New laws requiring additional nutritional information to be disclosed on our menus, changes in nutritional guidelines issued by the federal government agencies, issuance of similar guidelines or statistical information by other federal, state or local municipalities, or academic studies, among other things, may affect consumer choice and cause consumers to significantly alter their dining choices in ways that adversely affect our sales and profitability.
We are subject to all of the risks associated with leasing space subject to long-term non-cancelable leases, as well asand risks related to renewal.
As of December 30, 2018, 44729, 2019, 417 of our 484454 Company-owned restaurants are located on leased premises. Payments under our operating leases account for a significant portion of our operating expenses. Additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. In connection with closing restaurants, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term.
In addition, as each of our leases expires, there can be no assurance we will be able to renew our expiring leases after the expiration of all remaining renewal options, either on commercially acceptable terms or at all. As a result, we may incur additional costs to operate our restaurants, including increased rent and other costs related to the negotiation of terms of occupancy of an existing leased premise. If we are unable to renew a lease or determine not to renew a lease, there may be costs related to the relocation and development of a replacement restaurant or, if we are unable to relocate, reduced revenue.
The global and domestic economic environment may negatively affect frequency of guestGuest visits and average ticket spend at our restaurants, which would negatively affect our revenues and our results of operations.
The global and domestic economic environment affects the restaurant industry and may negatively affect us directly and indirectly through our customers, distributors, and suppliers. These conditions include unemployment, weakness and lack of consistent improvement in the housing markets, downtrend or delays in residential or commercial real estate development, volatility in the U.S. stock market and in other financial markets, inflationary pressures, wage rates, tariffs and other trade barriers, reduced access to credit or other economic factors that may affect consumer confidence. As a result, our Guests may be apprehensive about the economy and maintain or further reduce their level of discretionary spending. This could affect the frequency with which our Guests choose to dine out or the amount they spend on meals, thereby decreasing our revenues and potentially negatively affecting our operating results. Also, our Guests may choose to purchase food at supermarkets or other food retailers. We believe there is a risk that prolonged negative or uncertain economic conditions might cause consumers to make long-lasting changes to their discretionary spending behavior, including dining out less frequently or at lower priced restaurants on a more permanent basis, which would have a negative effect on our profitability as we spread fixed costs across a lower level of sales.
Changes in consumer buying patterns, particularly due to declines in traffic near our leased locations, and the increase in popularity of e-commerce sites and off premise sales, may affect our revenues, operating results, and liquidity.
The success of our restaurants depends in large part on leased locations. Our restaurants are primarily located near high density retail areas such as regional malls, lifestyle centers, big box shopping centers, and entertainment centers. We depend on a high volume of visitors at these centers to attract Guests to our restaurants. As demographic and economic patterns change,
current locations may or may not continue to be attractive or profitable. E-Commerce or online shopping continues to increase and negatively impact consumer traffic at traditional “brick and mortar” retail sites located in regional malls, lifestyle centers, big box shopping centers and entertainment centers. A decline in development or closures of businesses in these settings or a decline in visitors to retail areas near our restaurants could negatively affect our restaurant sales. In addition, desirable locations for the relocation of existing restaurants may not be available at an acceptable cost, due in part to the inability to easily terminate a long-term lease.
In the last several years, off premise sales, specifically delivery, have increased due to consumer demand for convenience. While we plan to continue to invest in the growth of our online, to-go, catering, and delivery services to drive off premise sales, there can be no guarantee we will be able to continue to increase our off premiseoff-premise sales. Off premise sales could also cannibalize dine in sales, or our systems and procedures may not be sufficient to handle off premise sales, which may require additional investments in technology or people. Additionally, a large percentage of delivery from our restaurants is through third party delivery companies. These third partythird-party delivery companies require us to pay them a commission, which lowers our profit margin on those sales. Any bad press, whether true or not, regarding third party delivery companies or their business model may negatively impact our sales.
While we plan to introduce an alternative to third party delivery by offering an online Company platform to collect orders and outsource the “last mile” of delivery, we may not be able to convert Guests to our platform and that model remains subject to some of the same risks.
Our operations are susceptible to the changes in cost and availability of commodities which could negatively affect our operating results.
Our profitability depends in part on our ability to anticipate and react to changes in commodity costs. Various factors beyond our control, including adverse weather conditions, governmental regulation and monetary policy, potential imposition of tariffs on imports from other countries, product availability, recalls of food products, and seasonality, as well as the effects of the current macroeconomic environment on our suppliers, may affect our commodity costs or cause a disruption in our supply chain. In an effort to mitigate some of this risk, we enter into fixed price agreements on some of our food and beverage products, including certain proteins, produce and cooking oil. As of the end of 2018, 62.3%2019, approximately 60% of our estimated 20192020 annual food and beverage purchases were covered by fixed price contracts, most of which are scheduled to expire at various times during 2019.through 2021. Changes in the price or availability of commodities for which we do not have fixed price contracts could have a material adverse effect on our profitability. Expiring contracts with our food suppliers could also result in unfavorable renewal terms and therefore increase costs associated with these suppliers or may necessitate negotiations with alternate suppliers. Although the majority of our commodities are sourced domestically, changes in trade policy and tariffs could negatively impact our commodity costs. We may be unable to obtain favorable contract terms with suppliers or adjust our purchasing practices and menu prices to respond to changing food costs, and a failure to do so could negatively affect our operating results.
We may experience interruptions in the delivery of food and other products from third parties.
Our restaurants depend on frequent deliveries of fresh produce, food, beverage and other products. This subjects us to the risk of interruptions in food and beverage supplies that may result from a variety of causes including, but not limited to, outbreaks of food-borne illness, disruption of operation of production facilities, the financial difficulties, including bankruptcy of our suppliers or other unforeseen circumstances. Such shortages could adversely affect our revenue and profits. Our
restaurants bear risks associated with the timeliness of deliveries by suppliers and distributors as well as the solvency, reputation, labor relationships, freight rates, and health and safety standards of each supplier and distributor. Other significant risks associated with our suppliers and distributors include improper handling of food and beverage products and/or the adulteration or contamination of such food and beverage products.
Price increases may negatively affect guestGuest visits.
We may make future price increases, primarily to offset increased costs and operating expenses. We cannot provide assurance that any future price increases will not deter Guests from visiting our restaurants, reduce the frequency of their visits, or affect their purchasing decisions.
New or improved technologies or changes in consumer behavior facilitated by these technologies could negatively affect our business.
Advances in technologies or certain changes in consumer behavior driven by such technologies could have a negative effect on our business. Technology and consumer offerings continue to develop, and we expect new or enhanced technologies and consumer offerings will be available in the future. We may pursue certain of those technologies and consumer offerings if we believe they offer a sustainable guestGuest proposition and can be successfully integrated into our business model. However, we cannot predict consumer acceptance of these delivery channels or their impact on our business. In addition, our competitors, some of whom have greater resources than us, may be able to benefit from changes in technologies or consumer acceptance of such changes, which could harm our competitive position. There can be no assurance we will be able to successfully respond to
changing consumer preferences, including with respect to new technologies or to effectively adjust our product mix, service offerings, and marketing initiatives for products and services that address, and anticipate advances in, technology, and market trends. If we are not able to successfully respond to these challenges, our business, financial condition, and operating results could be harmed.
If there is a material failure in our information technology systems, our business operations and profits could be negatively affected, and our systems may be inadequate to support our future growth strategies.
We rely heavily on information technology systems in all aspects of our operations including our restaurant point-of sale systems, financial systems, marketing programs, employee engagement, supply chain management, cyber-security, and various other processes and transactions. Our ability to effectively manage and run our business depends on the reliability and capacity of our information technology systems, including technology services and systems for which we contract from third parties. These systems and services may be insufficient to effectively manage and run our business. These systems and our business needs will continue to evolve and require upgrading and maintenance over time, consequently requiring significant future commitments of resources and capital.
Moreover, these technology services and systems, communication systems, and electronic data could be subject or vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, loss of data, data breaches, or other attempts to harm our systems. See “-A privacy or security breach involving our information technology systems or the failure of our data security measures could interrupt our business, damage our reputation, and negatively affect our operations and profits” above. A failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or any other failure to maintain a continuous and secure information technology network for any of the above reasons could result in interruption and delays in guestGuest services, adversely affect our reputation, and negatively impact our results of operations.
Expanding our restaurant base is a component of our long-term growth and our ability to open and profitably operate new restaurants is subject to factors beyond our control.
The expansion of our restaurant base depends in large part on our ability and the ability of our franchisees to timely and efficiently open new restaurants and to operate these restaurants on a profitable basis. Delays or failures in opening new restaurants, or the inability to profitably operate them once opened, could materially and adversely affect our planned growth. The success of our expansion strategy and the success of new restaurants depends upon numerous factors, many of which are beyond our control, including the following:
changes to our volatility in the macroeconomic environment nationally and regionally, which could affect restaurant-level performance and influence our decisions on the rate of expansion, timing, and the number of restaurants to be opened;
competition in our markets and general economic conditions that may affect consumer spending or choice;
identification of and ability to secure an adequate supply of available and suitable restaurant sites;
timely adherence to development schedules;
cost and availability of capital to fund restaurant expansion and operation;
negotiation of favorable lease and construction terms;
the availability of construction materials and labor;
our ability to manage construction and development costs of new restaurants;
unforeseen environmental problems with new locations;
securing required governmental approvals and permits, including liquor licenses, in a timely manner or at all;
our ability to locate, hire, train, and retain qualified operating personnelTeam Members to staff our new restaurants, especially managers;
our ability to attract and retain Guests;
weather, natural disasters, and other calamities; and
our ability to operate at acceptable profit margins.
We are subject to the risks presented by acquisitions or refranchising.
As part of our expansion efforts, we have acquired some of our franchised restaurants in the past. In the future, we may, from time to time, consider opportunistic acquisitions or dispositions of restaurants. We have also identified certain markets where we are pursuingmay in the future pursue refranchising
with quality operators.operators in certain identified markets. Any future acquisitions or dispositions will be accompanied by the risks commonly encountered in acquisitions. These risks include among other things:
the difficulty of integrating operations and personnel;Team Members;
the potential disruption to our ongoing business;
the potential distraction of management;
the effect on selling, general, and administrative expenses and earnings;
the inability to maintain uniform standards, controls, procedures and policies; and
the impairment of relationships with Team Members and Guests as a result of changes in ownership and management.
New or less mature restaurants, once opened, may vary in profitability and levels of operating revenue for six months or more.
New and less mature restaurants typically experience higher operating costs in both dollars and percentage of revenue initially when compared to restaurants in the comparable restaurant base. There is no assurance new restaurants in the future will continue to experience success. It takes approximately six months or more for new restaurants to reach normalized operating levels due to inefficiencies and other factors typically associated with new restaurants. These factors include operating costs, which are often significantly greater during the first several months of operation, and fluctuating guestGuest counts at new locations, as well as competition from our competitors or our own restaurants, consumer acceptable of our restaurants in new markets and lack of market awareness of our brand in a new market. Further, there is no assurance our less mature restaurants will attain operating results similar to those of our existing restaurants.
The large number of Company-owned restaurants concentrated in the western United States makes us susceptible to changes in economic and other trends in that region.
As of December 30, 2018,29, 2019, a total of 181180 or 37.4%39.6% of allour 454 Company-owned restaurants, representing 45.1%46.0% of restaurant revenue, were located in the westernWestern United States (i.e., Arizona, California, Colorado, Nevada, Oregon, Idaho, New Mexico, Utah, and Washington state). As a result of our geographic concentration, negative publicity regarding any of our restaurants in the western United States, as well as regional differences in the legal, regulatory, and litigation environment, could have a material adverse effect on our business and operations, as could other regional occurrences such as local strikes, energy shortages, or increases in energy prices, droughts, earthquakes, fires, or other natural disasters.
Our revenues and operating results may fluctuate significantly due to various risks and unexpected circumstances, including increases in costs, seasonality, weather, and other factors outside our control.
We are subject to a number of significant risks that might cause our actual quarterly and annual results to fluctuate significantly or be negatively affected. These risks include but are not limited to: extended periods of inclement weather which may affect guestGuest visits as well as limit the availability and cost of key commodities such as beef, poultry, potatoes, and other items that are important ingredients in our products; material disruptions in our supply chain; changes in borrowings and
interest rates; changes to accounting methods or principles; impairment of long-lived assets, including goodwill, and losses on restaurant closures; and unanticipated expenses from natural disasters and repairs to damaged or lost property.
Moreover, our business fluctuates seasonally. Historically, sales in most of our restaurants have been higher during the summer months and winter holiday season. As a result, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly as a result of seasonality and the factors discussed above. 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, and comparable restaurant sales for any particular future period may decrease.
We rely on our senior executive team for the development and execution of our business strategy and the loss of any member of our senior executive team could negatively affect our operating results.
Key members of our senior executive management team are central to our success and difficult to replace. We may be unable to retain them or attract other highly qualified senior executives, particularly if we do not offer competitive employment terms. The loss of the services of any of our key senior executives or the failure to implement an appropriate succession plan could prevent us from achieving our business strategy and initiatives, which could adversely affect our operating results.
If we are unable to successfully recruit and retain qualified restaurant management and operating personnelTeam Members in an increasingly competitive market, we may be unable to effectively operate and grow our business and revenues, which could materially adversely affect our financial performance.
We must continue to attract, retain, and motivate a sufficient number of qualified management and operating personnelTeam Members to maintain consistencyprovide the desired Guest and Team Member experience in the quality of our restaurants.restaurants or deliver on our strategy. Qualified
management and operating personnelTeam Members are currently in high demand. If we are unable to attract and retain qualified people, especially at the General Manager level, our restaurants could be short staffed, we may be forced to incur overtime expenses, hourly Team Member turnover could increase, and our ability to operate our restaurants and expand our conceptsroll out new service model and technology solutions effectively could be limited, and the guestGuest experience could be negatively affected, leading to a decline in traffic and sales.
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. 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 personnel.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.
Further, we are subject to federal and state laws that regulate the offer and sale of franchises and aspects of the licensor-licensee relationship. Also, there may be circumstances in which we may be held liable for the actions of our franchisees. In a 2014 action, the National Labor Relations Board (NLRB) alleged McDonald’s USA, LLC (the parent-franchisor company for McDonald’s restaurants) could be jointly liable for labor and wage violations by its franchisees. Although the parties reached a proposed settlement in March 2018, the administrative law judge in the action rejected the proposed settlement in July 2018. If the action is not settled and results in an adverse outcome against McDonald’s USA, liability for franchisees’ overtime, wage, or union-organization violations could be pursued against us. Failure to comply with the laws and regulations governing our franchisee relationships or adverse decisions similar to the above-described NLRB action could subject us to liability for actions of the franchisees, or expose us to liability to franchisees, or fines and penalties for non-compliance.
Decreased cash flow from operations, or an inability to access credit could negatively affect our business initiatives or may result in our inability to execute our revenue, expense, and capital deployment strategies.
Our ability to fund our operating plans and to implement our capital deployment strategies depends on sufficient cash flow from operations or other financing, including using funding under our revolving credit agreement. Our capital deployment strategies include but are not limited to paying down debt, new restaurant development, investment in technology, investment in advertising, repurchases of our stock, and franchise expansion. If we experience decreased cash flow from operations, our ability to fund our operations and planned initiatives, and to take advantage of growth opportunities, may be delayed or negatively affected. In addition, these disruptions and any resulting negative effect on our net income, cash flows, or other relevant financial performance metrics
under our revolving credit facility could affect our ability to borrow or comply with our covenants under that facility. Moreover, any repurchase by us of our shares of common stock will further reduce cash available for operations and future growth, as well as debt repayment.
Our future success depends on our ability to protect our intellectual property.
Our business prospects will depend in part on our ability to protect our proprietary information and intellectual property, including the Red Robin, Red Robin Gourmet Burgers®, Red Robin America’s Gourmet Burgers & Spirits®, Red Robin Burger Works®, “YUMMM®”, Red Robin Gourmet Burgers and BrewsTM, and Red Robin RoyaltyTM names and logos. We have registered or filed applications for trademarks for these names and logos, among others, with the United States Patent and Trademark Office and in Canada and we have applied to register various trademarks in certain other international jurisdictions. Our trademarks could be infringed in ways that leave us without redress, such as by imitation or by filings by others in jurisdictions where we are not currently registered. In addition, we rely on trade secrets and proprietary know-how in operating our restaurants, and we employ various methods to protect these trade secrets and proprietary know-how. However, such methods may not afford adequate protection and others could independently develop similar know-how or obtain access to our know-how, concepts, and recipes. Consequently, our business could be negatively affected and less profitable if we are unable to successfully defend and protect our intellectual property.
We are subject to economic, political, regulatory, and other risks related to our international operations.
As of December 30, 2018, we owned 18 Red Robin restaurants in Canada and may have further international expansion in the future. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic, and political risks that are different from and incremental to those in the United States. In addition to the risks we face in the United States, our international operations involve risks that could adversely affect our business, including:
the need to adapt our brand for specific cultural and language differences;
new and different sources of competition;
difficulties and costs associated with staffing and managing foreign operations;
difficulties in adapting and sourcing product specifications for international restaurant locations;
fluctuations in currency exchange rates, which could impact revenues and expenses of our international operations and expose us to foreign currency exchange rate risk;
difficulties in complying with local laws, regulations, and customs in foreign jurisdictions;
unexpected changes in regulatory requirements;
political or social unrest and economic instability;
compliance with U.S. laws such as the Foreign Corrupt Practices Act, and similar laws in foreign jurisdictions;
differences in enforceability of intellectual property and contract rights;
adverse tax consequences;
profit repatriation and other restrictions on the transfer of funds; and
different and more stringent user protection, data protection, privacy and other laws.
Our failure to manage any of these risks successfully could harm our future international operations and our overall business, and results of our operations.
Risks Related to the Restaurant Industry
Food safety and food-borne illness concerns, and any related unfavorable publicity could have an adverse effect on our business.
We dedicate substantial resources to ensuring our Guests enjoy safe, quality food products. Nonetheless, restaurant businesses such as ours can be adversely affected by publicity resulting from complaints or litigation regarding poor food quality, food-borne illness, personal injury, food tampering, communicable disease, adverse health effects of consumption of
various food products or high-calorie foods, or other concerns. Food safety issues also could be caused by food suppliers or distributors and, as a result, could be out of our control. Regardless of the source or cause, any report of food-borne illnesses such as E. coli, norovirus, listeria, hepatitis A, salmonella, or trichinosis, as well as other food safety issues including food tampering or contamination, at one of our or a franchisee’s restaurants, could adversely affect our reputation and have a negative impact on our sales. The occurrence of food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and lower margins.
Health concerns relating to the consumption of beef, chicken, or other food products could affect consumer preferences and could negatively affect our results of operations.
Consumer preferences could be affected by health concerns about food-related illness, the consumption of beef (which is the key ingredient in many of our menu items), or negative publicity or publication of government or industry findings concerning food quality, illness, and injury. Further, consumers may react negatively to reports concerning our food products or health or other concerns or operating issues stemming from one or more of our restaurants. Such negative publicity, whether or not valid, may negatively affect demand for our food and could result in decreased guestGuest traffic to our restaurants. A decrease in guestGuest traffic to our restaurants as a result of these health concerns or negative publicity or as a result of a change in our menu or concept could materially harm our business and negatively affect our profitability.
Our business could be adversely affected by increased labor costs, including costs related to the increase in minimum wage and new heath care laws.
Labor is a primary component in the cost of operating our business. Increased labor costs, whether due to competition, unionization, increased minimum and tip wage, state unemployment rates, employee benefits costs, or otherwise, may adversely impact our operating expenses. A considerable amount of our restaurant Team Members are paid at rates related to the federal, state, or local minimum wage. Further, we have a substantial number of restaurants located in states or municipalities where the minimum wage is greater than the federal minimum wage, including Oregon, California, Washington, Oregon, and New York. For example, OregonCalifornia enacted legislation that increased its minimum wage to employers in Oregon through a series of annual minimum wage rate increases, with increases from $9.25$10.50 an hour from the time of its initial effective date in July 2016, upJanuary 2017 to $14.75$15 an hour in the Portland metro area (and lower rates outside of Portland), effective in JulyJanuary 2022. Beginning July 1, 2023, the minimum wage rate in Oregon will be indexed to inflation based on the consumer price index.In addition, some California localities currently mandate wages higher than $15 an hour. We anticipate additional legislation increasing minimum wage standards will be enacted in future periods and in other jurisdictions.
In the past, many of our eligible Team Members chose not to participate in our Company-sponsored health care plans for various reasons, but we expect to continue to see increased costs due to the impact of changes in the health care laws, including as a result of any repeal, replacement or other significant modifications of The Patient Protection and Affordable Care Act of 2010 (the "PPACA"“PPACA”). Our distributors and suppliers also may be affected by higher minimum wage or health care costs, which could result in higher costs for goods and services supplied to us. In addition, a shortage in the labor pool or other general inflationary pressures or changes could also increase our labor costs. In the past, we have been able to offset increases in labor costs by improving our productivity or changing staffing models in our restaurants or by taking gradual increases in pricing, but there is no guarantee we can continue to do so in the future. If our labor costs increase and we are not able to offset costs through productivity or efficiency gains from changing staffing models, or to pass along the costs in the form of increased prices to our Guests, then it could have a material adverse effect on our results of operations. Further, if we changechanges to our staffing models in our restaurants due to labor costs or any labor shortages, it could negatively impact our ability to provide adequate service levels to our Guests, which could result in adverse guestGuest reactions and a possible reduction in guestGuest traffic at our restaurants.
Our failure to remain in compliance with governmental laws and regulations as they continually evolve, and the associated costs of compliance, could cause our business results to suffer.
Our business is subject to various federal, state, and local government laws and regulations, including, among others, those relating to our employees, public health and safety, food safety, alcoholic beverage control, public accommodations, financial and disclosure reporting and controls, and consumer health regulations, including those pertaining to nutritional content and menu labeling such as the Affordable Care Act, which requires restaurant companies such as ours to disclose calorie information on their menus. These laws and regulations continually evolve and change, and compliance may be costly and time-consuming. Moreover, we may fail to maintain compliance with all laws and regulations despite our best efforts. Changes in applicable laws and regulatory requirements, or failure to comply with them could result in, among other things, increased exposure to litigation, administrative enforcement actions or governmental investigations or proceedings; revocation of required licenses or approvals; fines; and civil and criminal liability. These negative consequences could increase the cost of or interfere with our ability to operate our business and execute our strategies.
Various federal, state, and local employment laws govern our relationship with our Team Members and affect operating costs. These laws govern employee classification, wage rates, fair scheduling and payment requirements including tip credit laws and overtime pay, meal and rest breaks, unemployment and other taxes, health care and benefits, workers’ compensation rates, citizenship or residency requirements, labor relations, child labor regulations, and discriminatory conduct. Changes in
these laws or our failure to comply with enforcement requirements could require changes to our operations that could harm our operating results. For example, although we require all of our Team Members to provide us with the government-specified documentation evidencing their employment eligibility, some of our Team Members, without our knowledge, may not meet federal citizenship or residency requirements, which could lead to a disruption in our work force. A number of other factors could adversely affect our operating results, including:
additional government-imposed increases in minimum and/or tipped wages, overtime pay, paid leaves of absence, sick leave, and mandated health benefits;
increased tax reporting and tax payment requirements for employees who receive gratuities;
a reduction in the number of states that allow gratuities to be credited toward minimum wage requirements; and
increased employee litigation including claims under federal and/or state wage and hour laws.laws, including the WARN Act.
We are subject to “dram shop” statutes in some states. These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to such intoxicated person. Failure to comply with alcoholic beverage control or dram shop regulations could subject us to liability and could negatively affect our business.
A significant increase in litigation could have a material adverse effect on our results of operations, financial condition and business prospects.
As a member of the restaurant industry, we are sometimes the subject of complaints or litigation, including class action lawsuits, from Guests alleging illness, injury, or other food quality, health, or operational concerns. Negative publicity resulting from these allegations could harm our restaurants, regardless of whether the allegations are valid or whether we are liable. In fact,addition, we are subject to the same risks of negative publicity resulting from these sorts of allegations even if the claim actually involves one of our franchisees.
In addition, anyAny failure by us to comply with the various federal and state labor laws governing our relationship with our Team Members including requirements pertaining to minimum wage, overtime pay, meal and rest breaks, unemployment tax rates, workers’ compensation rates, citizenship or residency requirements, child labor regulations, and discriminatory conduct, may have a material adverse effect on our business or operations. We have been subject to such claims from time to time. The possibility of a material adverse effect on our business relating to employment litigation is even more pronounced given the high concentration of team membersTeam Members employed in the western United States, as this region, and California in particular, has a substantial amount of legislative and judicial activity pertaining to employment-related issues. Further, employee claims against us based on, among other things, discrimination, harassment, or wrongful termination may divert our financial and management resources that would otherwise be used to benefit the future performance of our operations.
Labor organizing could adversely affect our operations and harm our competitive position in the restaurant industry, which could harm our financial performance.
Our employees or others may attempt to unionize our workforce, establish boycotts or picket lines or interrupt our supply chains which could increase our labor costs, limit our ability to manage our workforce effectively, and cause disruptions to our operations. A loss of our ability to effectively manage our workforce and the compensation and benefits we offer to our staff members could harm our financial performance.
Our current insurance may not provide adequate levels of coverage against claims.
There are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure against. Such losses could have a material adverse effect on our business and results of operations. In addition, we self-insure a significant portion of expected losses under our employee health, workers’ compensation, general liability, property and cyber insurance programs. Unanticipated changes in the actuarial assumptions and management estimates underlying our reserves for these losses could result in materially different amounts of expense under these programs, which could have a material adverse effect on our financial condition, results of operations and liquidity. Failure to obtain and maintain adequate directors’ and officers’ insurance could materially adversely affect our ability to attract and retain qualified officers and directors.
Risks Related to Owning Our Stock
The market price of our common stock is subject to volatility, which could in turnhas and may continue to attract the interest of activist stockholders.
During fiscal 2018,2019, the price of our common stock fluctuated between $25.46$24.57 and $74.11$36.85 per share. The market price of our common stock may be significantly affected by a number of factors, including, but not limited to, actual or anticipated variations in our operating results or those of our competitors as compared to analyst expectations, changes in financial estimates by research analysts with respect to us or others in the restaurant industry, and announcements of significant transactions (including mergers or acquisitions, divestitures, joint ventures or other strategic initiatives) by us or others in the restaurant industry. In addition, the equity markets have experienced price and volume fluctuations that affect the stock price of companies in ways that have been unrelated to an individual company’s operating performance. The price of our common stock may continue to be volatile, based on factors specific to our company and industry, as well as factors related to the equity markets overall. Moreover, such volatility couldhas recently and may continue to attract the interest of activist stockholders. Responding to activist stockholders can be costly and time-consuming, and the perceived uncertainties as to our future direction resulting from responding to activist strategies could itself then further affect the market price and volatility of our common stock.
Any failure to repurchase the Company’s stock up to the maximum amounts permitted under our previously announced repurchase program may negatively impact investor perception of us and may affect the market price and volatility of our stock.
Our stock repurchase program may require us to use a significant portion of our cash flow from operations and/or may require us to incur indebtedness utilizing our existing credit facility or some other form of debt financing. Our ability to repurchase stock will depend on our ability to generate sufficient cash flows from operations, as supplemented by proceeds from the exercise of employee stock options and our capacity to borrow funds, which may be subject to economic, financial, competitive and other factors that are beyond our control. The inability to complete stock repurchases under our previously announced repurchase program may negatively impact investor perception of us and may therefore affect the market price and volatility of our stock.
Provisions in our shareholder rights plan may discourage potential acquirers of the Company.
We have adopted a shareholder rights plan, which provides, among other things, that when specified events occur, our stockholders will be entitled to purchase from us shares of junior preferred stock. The shareholder rights plan is currently scheduled to expire on June 2, 2020, but the expiration date will be extended until June 2, 2021 if the plan is ratified by our stockholders at the 2020 Annual Meeting of Stockholders. The preferred stock purchase rights are triggered upon the earlier of (x) ten business days after the date of a public announcement that a person or group acting in concert has acquired, or obtained the right to acquire, beneficial ownership of 10% (20% in the case of a passive institutional investor) or more of our outstanding common stock or (y) such date as may be determined by the board following the commencement of, or public announcement of an intention to make, a tender or exchange offer, the consummation of which would result in any person or group acting in concert acquiring beneficial ownership of 10% (20% in the case of a passive institutional investor) or more of our outstanding common stock. The preferred stock purchase rights would cause dilution to a person or group that attempts to acquire the Company without the approval of our board of directors. Although our shareholder rights plan is intended to encourage an acquiring person to negotiate a proposed merger or other business combination with our board of directors and management, it could discourage a takeover transaction that stockholders may consider favorable and may lead to an entrenchment of management. Our shareholder rights plan may give our current directors and executive officers a substantial ability to influence the outcome of a proposed acquisition of the Company. These provisions would apply even if an acquisition or other significant corporate transaction was considered beneficial by some of our stockholders. If a change in control or change in management is delayed or prevented by these provisions, the market price of our securities could decline.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
We currently lease the real estate for most of our Company-owned restaurant facilities under operating leases with remaining terms ranging from less than one year to over 15 years excluding options to extend. These leases generally contain options which permit us to extend the lease term at an agreed rent or at prevailing market rates. Certain leases provide for contingent rents, which are determined as a percentage of adjusted gross restaurant sales in excess of specified levels. We recordContingent rental payments are recognized as a contingent rent liability and the corresponding rentvariable lease expense when specified levels have been achieved or when management determines achieving the specified levels during the year is probable. Certain lease agreements also require the Company to pay maintenance, insurance, and property tax costs.
We own real estate for 37 Company-owned restaurants located in Arizona (4); Arkansas (1); California (1); Colorado (4); Florida (1); Georgia (1); Illinois (1); Indiana (1); Maryland (1); Missouri (1); North Carolina (3); Ohio (4); Pennsylvania (3); Texas (5); Virginia (4); and Washington (2).
Our corporate headquarters is located in Greenwood Village, Colorado. We occupy this facility under a lease that expires on May 31, 2025. We operate a test kitchen and training facility located in Englewood, Colorado under a lease that expires DecemberMay 31, 2022.2025.
Our currentexisting prototype for new Red Robin restaurants is approximately 4,500 to 5,800 square feet with a capacity of approximately 145 to 200 seats. We develop restaurants under ground leases on which we build our own restaurant in addition to using in-line, end cap, and mall locations. As of December 30, 2018,29, 2019, our restaurant locations comprised approximately 32.8 million square feet.
ITEM 3. Legal Proceedings
Evaluating contingencies related to litigation is a complex process involving subjective judgment on the potential outcome of future events and the ultimate resolution of litigated claims may differ from our current analysis. Accordingly, we review the adequacy of accruals and disclosures each quarter in consultation with legal counsel and we assess the probability and range of possible losses associated with contingencies for potential accrual in the consolidated financial statements.
On July 14, 2017, a current hourly employee filed a class action lawsuit alleging that the Company failed to provide required meal breaks and rest periods and failed to reimburse business expenses, among other claims. The case is styled Manuel Vigueras v. Red Robin International, Inc. and is currently pending before the United States District Court in Santa Ana, California. Trial is expected to commence on or about February 25, 2020. In a related action, on September 21, 2017, a companion case, styled Genny Vasquez v. Red Robin International, Inc. was filed and is currently pending in California Superior Court in Santa Ana, California and involves claims under the California Private Attorneys’ General Act (“PAGA”) that partially overlap in the claims made in the Vigueras matter. Trial for that case is expected to commence on April 13, 2020. We believe we have meritorious defenses to each of the claims in these lawsuits and intend to defend vigorously these allegations. However, there can be no assurance we will be successful, and an adverse resolution of any one of these cases could have a material adverse effect on our consolidated financial position and results of operations in the period in which the case is resolved.
In the normal course of business, there are various claims in process, matters in litigation, and other contingencies. These include employment related claims and claims from Guests or Team Members alleging illness, injury, food quality, health, or operational concerns. To date, no claims of these types of litigation, certain of which are covered by insurance policies, have had a material effect on the Company. While it is not possible to predict the outcome of these suits, legal proceedings, and claims with certainty, management is of the opinion that adequate provision for potential losses associated with these matters has been made in the financial statements and that the ultimate resolution of these matters will not have a material adverse effect on our financial position and results of operations.
ITEM 4. Mine Safety Disclosures
Not applicable.
PART II
ITEM 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on The NASDAQ Global Select Market under the symbol RRGB. As of February 25, 2019,2020, there were 9792 registered owners of our common stock.
Dividends
We did not declare or pay any cash dividends on our common stock during 20182019 and 2017.2018. We currently anticipate we will retain any future cash flow to fund our operations and expand our business, to pay down debt or to repurchase shares. In addition, our credit agreement may limit us from declaring or paying any dividends or markingmaking any other repurchases on any of our shares under certain circumstances, and we are subject to the leverage ratio under our credit agreement.
Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant.
Issuer Purchases of Equity Securities
During the fiscal quarter ended December 30, 2018,29, 2019, 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. On August 9, 2018,
the Company’s board of directors authorized an increase to the Company’s share repurchase program of approximately $21 million to a total of $75 million of the Company’s common stock. The increased share repurchase authorization became effective on August 9, 2018, and will terminate upon completing repurchases of $75 million of common stock unless otherwise terminated by the board. Purchases under the repurchase program may be made in open market or privately negotiated transactions and may include transactions pursuant to a repurchase plan administered in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended. Purchases may be made from time to time at the Company’s discretion, and the timing and amount of any share repurchases will be determined based on share price, market conditions, legal requirements, and other factors. The repurchase program does not obligate the Company to acquire any particular amount of common stock, and the Company may suspend or discontinue the repurchase program at any time. The table below provides a summary of the Company's purchases of its own common stock during the fourth quarter of 2018.
2019. |
| | | | | | | | | | | | | | |
Period(1) | | Total Number of Shares (or Units) Purchased | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Dollar Value of Shares (or Units) that May Yet be Purchased Under the Plan (in thousands) |
| 10/7/19-11/3/19 | | 12,000 |
| | $ | 31.60 |
| | 131,600 |
| | $ | 70,713 |
|
| 11/4/19-12/1/19 | | 11,400 |
| | 27.39 |
| | 143,000 |
| | 70,401 |
|
| 12/2/19-12/29/19 | | 11,400 |
| | $ | 28.53 |
| | 154,400 |
| | $ | 70,075 |
|
Pursuant to Publicly Announced Plans or Programs(2) | | 34,800 |
| | | | | | |
|
| | | | | | | | | | |
| Period(1) | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be Purchased Under the Plan (in thousands) |
| 10/8/18-11/4/18 | 11,800 |
| $ | 35.36 |
| 20,400 |
| $ | 74,246 |
|
| 11/5/18-12/2/18 | 11,400 |
| $ | 34.32 |
| 31,800 |
| $ | 73,855 |
|
| 12/3/18-12/30/18 | 10,800 |
| $ | 30.49 |
| 42,600 |
| $ | 73,526 |
|
| Pursuant to Publicly Announced Plans or Programs(2) | 34,000 |
| | | |
(1) The reported periods conform to the Company's fiscal calendar composed of thirteen 28-day periods.
(2) Since From August 9, 2018, when the increase in the share repurchase program was originally authorized through December 29, 2019, the Company has purchased 42,600154,400 shares for a total of $1.5$4.9 million. Prior toAs of August 9, 2018 when the increase in the share repurchase authorization,was authorized, the program had a remaining authorized purchase limit of $53.9 million out of the $100.0 million prior authorization from February 2016.
Performance Graph
The following graph compares the yearly percentage in cumulative total stockholders’ return on Common Stock of the Company since December 29, 2013,26, 2014, with the cumulative total return over the same period for (i) theThe Russell 3000 Index, and (ii) the S&P 600 Restaurants Index.Restaurants.
Pursuant to rules of the SEC, the comparison assumes $100 was invested on December 29, 2013,26, 2014, the last trading day in the Company’s 20132014 fiscal year, in the Company’s Common Stock and in each of the indices.
This performance graph shall not be deemed to be “soliciting material” or to be “filed” under either the Securities Act or the Exchange Act.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*RETURN(1)
Among Red Robin Gourmet Burgers, Inc., The Russell 3000 Index
and S&P 600 Restaurants Index
|
| | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended |
| | December 29, 2013 | | December 28, 2014 | | December 27, 2015 | | December 25, 2016 | | December 31, 2017 | | December 30, 2018 |
| Red Robin Gourmet Burgers, Inc. | $ | 100.00 |
| | 101.61 |
| | 82.22 |
| | 75.06 |
| | 74.99 |
| | 35.53 |
|
| Russell 3000 | 100.00 |
| | 113.87 |
| | 113.27 |
| | 127.15 |
| | 151.55 |
| | 141.59 |
|
| S&P 600 Restaurants | 100.00 |
| | 125.53 |
| | 120.34 |
| | 142.90 |
| | 148.34 |
| | 160.86 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Years Ended |
| | December 28, 2014 | | December 27, 2015 | | December 25, 2016 | | December 31, 2017 | | December 30, 2018 | | December 29, 2019 |
| Red Robin Gourmet Burgers, Inc. (RRGB) | $ | 100.00 |
| | $ | 80.92 |
| | $ | 73.87 |
| | $ | 73.80 |
| | $ | 34.96 |
| | $ | 40.60 |
|
| The Russell 3000 Index | 100.00 |
| | 99.47 |
| | 111.67 |
| | 133.09 |
| | 124.34 |
| | 163.81 |
|
S&P 600 Restaurants(2) | 100.00 |
| | 95.87 |
| | 113.84 |
| | 118.17 |
| | 128.14 |
| | 142.30 |
|
| |
*(1) | $100Represents performance of $100 invested on December 29, 20132014 in stock or index, including reinvestment of dividends based on calendar years ending December 31 for purposes of comparability. |
| |
(2) | The S&P 600 Restaurants includes companies such as Bloomin' Brands Inc., Chuy's Holdings Inc., Dine Brands Global, Inc., and Fiesta Restaurant Group, Inc. |
ITEM 6. Selected Financial Data
The table below contains selected consolidated financial and operating data. The statement of operations and comprehensive income (loss), cash flow, and balance sheet data for each fiscal year has been derived from our consolidated financial statements. YouThis selected financial data should be read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.
| | | | | Fiscal Year Ended | | Fiscal Year |
| | | December 30, 2018 | | December 31, 2017 | | December 25, 2016 | | December 27, 2015 | | December 28, 2014 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (in thousands, except per share data) | | (52 Weeks) | | (53 Weeks) | | (52 Weeks) | | (52 Weeks) | | (52 Weeks) | |
| (in thousands, except per share and operating data) | | | (52 Weeks) | | (52 Weeks) | | (53 Weeks) | | (52 Weeks) | | (52 Weeks) |
| Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | | | | | | | | | | |
| Restaurant revenue | | $ | 1,316,209 |
| | $ | 1,365,060 |
| | $ | 1,280,669 |
| | $ | 1,238,898 |
| | $ | 1,129,135 |
| | $ | 1,289,521 |
| | $ | 1,316,209 |
| | $ | 1,365,060 |
| | $ | 1,280,669 |
| | $ | 1,238,898 |
|
Total revenues(1) | | 1,338,563 |
| | 1,387,566 |
| | 1,303,187 |
| | 1,265,215 |
| | 1,153,988 |
| | 1,315,014 |
| | 1,338,563 |
| | 1,387,566 |
| | 1,303,187 |
| | 1,265,215 |
|
Total costs and expenses(2)(3)(4)(5)(6) | | 1,349,048 |
| | 1,348,534 |
| | 1,291,617 |
| | 1,198,170 |
| | 1,109,304 |
| | 1,328,141 |
| | 1,349,048 |
| | 1,348,534 |
| | 1,291,617 |
| | 1,198,170 |
|
| Income (loss) from operations | | (10,485 | ) | | 39,032 |
| | 11,570 |
| | 67,045 |
| | 44,684 |
| |
| Net income (loss) | | (6,419 | ) | | 30,019 |
| | 11,725 |
| | 47,704 |
| | 32,561 |
| |
| Earnings per share: | | | | | | |
| | |
| | |
| |
| (Loss) income from operations | | | (13,127 | ) | | (10,485 | ) | | 39,032 |
| | 11,570 |
| | 67,045 |
|
| Net (loss) income | | | (7,903 | ) | | (6,419 | ) | | 30,019 |
| | 11,725 |
| | 47,704 |
|
| (Loss) earnings per share: | | | | | | | | | |
| | |
|
| Basic | | $ | (0.49 | ) | | $ | 2.33 |
| | $ | 0.88 |
| | $ | 3.40 |
| | $ | 2.29 |
| | $ | (0.61 | ) | | $ | (0.49 | ) | | $ | 2.33 |
| | $ | 0.88 |
| | $ | 3.40 |
|
| Diluted | | $ | (0.49 | ) | | $ | 2.31 |
| | $ | 0.87 |
| | $ | 3.36 |
| | $ | 2.25 |
| | $ | (0.61 | ) | | $ | (0.49 | ) | | $ | 2.31 |
| | $ | 0.87 |
| | $ | 3.36 |
|
| Shares used in computing earnings per share: | | | | | | |
| | |
| | |
| | | | | | | | |
| | |
|
| Basic | | 12,976 |
| | 12,899 |
| | 13,332 |
| | 14,042 |
| | 14,237 |
| | 12,959 |
| | 12,976 |
| | 12,899 |
| | 13,332 |
| | 14,042 |
|
| Diluted | | 12,976 |
| | 12,998 |
| | 13,462 |
| | 14,216 |
| | 14,447 |
| | 12,959 |
| | 12,976 |
| | 12,998 |
| | 13,462 |
| | 14,216 |
|
| Balance Sheet Data: | | | | | | |
| | |
| | |
| | | | | | | | |
| | |
|
| Cash and cash equivalents | | $ | 18,569 |
| | $ | 17,714 |
| | $ | 11,732 |
| | $ | 22,705 |
| | $ | 22,408 |
| | $ | 30,045 |
| | $ | 18,569 |
| | $ | 17,714 |
| | $ | 11,732 |
| | $ | 22,705 |
|
| Total assets | | 843,941 |
| | 910,615 |
| | 918,545 |
| | 839,979 |
| | 735,889 |
| | 1,237,580 |
| | 843,941 |
| | 910,615 |
| | 918,545 |
| | 839,979 |
|
| Long-term debt, including current portion | | 203,575 |
| | 277,313 |
| | 347,838 |
| | 210,847 |
| | 147,896 |
| | 206,875 |
| | 203,575 |
| | 277,313 |
| | 347,838 |
| | 210,847 |
|
| Total stockholders’ equity | | 382,805 |
| | 387,435 |
| | 348,053 |
| | 374,311 |
| | 359,771 |
| | $ | 360,520 |
| | $ | 382,805 |
| | $ | 387,435 |
| | $ | 348,053 |
| | $ | 374,311 |
|
| Cash Flow Data: | | | | | | |
| | |
| | |
| | | | | | | | |
| | |
|
| Net cash provided by operating activities | | $ | 126,295 |
| | $ | 156,607 |
| | $ | 98,957 |
| | $ | 140,923 |
| | $ | 123,581 |
| | $ | 57,915 |
| | $ | 126,295 |
| | $ | 156,607 |
| | $ | 98,957 |
| | $ | 140,923 |
|
| Net cash used in investing activities | | (49,836 | ) | | (83,290 | ) | | (199,379 | ) | | (169,111 | ) | | (155,278 | ) | | (57,030 | ) | | (49,836 | ) | | (83,290 | ) | | (199,379 | ) | | (169,111 | ) |
| Net cash provided by (used in) financing activities | | (74,298 | ) | | (67,924 | ) | | 89,333 |
| | 28,767 |
| | 37,051 |
| | $ | 9,678 |
| | $ | (74,298 | ) | | $ | (67,924 | ) | | $ | 89,333 |
| | $ | 28,767 |
|
| Selected Operating Data: | | | | | | |
| | |
| | |
| | | | | | | | |
| | |
|
| Net sales per square foot in Company-owned restaurants | | $ | 441 |
| | $ | 461 |
| | $ | 449 |
| | $ | 466 |
| | $ | 462 |
| | $ | 439 |
| | $ | 441 |
| | $ | 461 |
| | $ | 449 |
| | $ | 466 |
|
Total operating weeks(7) | | 25,165 |
| | 25,038 |
| | 23,799 |
| | 22,006 |
| | 20,070 |
| | 24,707 |
| | 25,165 |
| | 25,038 |
| | 23,799 |
| | 22,006 |
|
| Company-owned restaurants open at end of period | | 484 |
| | 480 |
| | 465 |
| | 439 |
| | 415 |
| | 454 |
| | 484 |
| | 480 |
| | 465 |
| | 439 |
|
| Franchised restaurants open at end of period | | 89 |
| | 86 |
| | 86 |
| | 99 |
| | 99 |
| | 102 |
| | 89 |
| | 86 |
| | 86 |
| | 99 |
|
Comparable restaurant net sales (decrease) increase(8)(9) | | (2.6 | )% | | 0.7 | % | | (3.3 | )% | | 2.1 | % | | 3.1 | % | | (0.6 | )% | | (2.6 | )% | | 0.7 | % | | (3.3 | )% | | 2.1 | % |
| |
| (1) | Franchise and other revenue for 2015 and 2014 werewas previously reported as $18.7 million and $17.0 million with Topic 606 (Revenue from Contracts with Customers) adoption adjustments of $7.6 million and $7.9 million, resulting in an adjusted amount of $26.3 million. |
| |
| (2) | 2019 includes pre-tax non-cash asset impairment charges of $15.1 million primarily related to the impairment of 29 restaurants, $3.5 million of executive transition costs, $3.3 million of board and $24.9 million. Please see Note 2, Revenue for a further discussion of reclassifications recorded in connection with Topic 606.stockholder matter costs, $1.0 million |
of executive retention costs, and a $1.2 million gain relating to restaurant closures and refranchising. See Note 4, Other Charges, for additional discussion of the assets impaired during 2019.
| |
(2)(3) | 2018 includes pre-tax non-cash asset impairment charges of $28.1 million related to the impairment of 41 restaurants, 19 of which had immaterial impairments, $4.8 million related to litigation costs, and $2.9 million related to the disposal of smallwares. |
| |
(3)(4) | 2017 includes pre-tax non-cash asset impairment charges of $6.9 million related to the impairment of 13 restaurants. |
| |
(4)(5) | 2016 includes pre-tax non-cash asset impairment charges of $24.4 million related to the impairment of 19 restaurants, $2.5 million related to software impairment, and $0.8 million related to the relocation of a restaurant. 2016 also includes pre-tax costs of $6.7 million related to the closure of nine Red Robin Burger Works restaurants, $3.9 million related to litigation costs, and $0.7 million related to acquiring 13 franchised restaurants. |
| |
(5)(6) | 2015 includes pre-tax non-cash asset impairment charges of $0.6 million related to the impairment of two restaurants. |
| |
(6) | 2014 includes pre-tax costs of $1.8 million related to acquiring 36 franchised restaurants. 2014 also includes a pre-tax non-cash asset impairment charge of $8.8 million, of which $7.6 million related to the impairment of in-development software, and $1.2 million related to the impairment of three restaurants. |
| |
| (7) | Total operating weeks represent the number of weeks that the Company-owned restaurants were open during the reporting period. |
| |
| (8) | Please seeSee “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revenues” for a further discussion of our comparable restaurant designation. |
| |
| (9) | Comparable restaurant sales decrease and average annual comparable restaurant sales volumes for 2018 were calculated on a 52-week basis by adjusting fiscal 2017 to exclude the first week of 2017. Comparable restaurant sales decrease and average annual comparable restaurant sales volumes for 2017 were calculated on a 53-week basis by adjusting fiscal year 2016 as if there were 53 weeks. |
ITEM 7. Management’sManagement’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 consolidated financial statements. All comparisons under this heading between 2019 and 2018 refer to the fifty-two week periods ending December 29, 2019 and December 30, 2018, respectively, unless otherwise indicated.
Overview
Description of the Business
Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries (“Red Robin,” “we,” “us,” “our,”“our” or the “Company”), primarily develops, operates, franchises, and franchisesdevelops full-service restaurants with 573556 locations in North America. As of December 30, 2018,29, 2019, the Company’s fiscal year end, weCompany operated 484454 Company-owned restaurants located in 39 states and two Canadian provinces.38 states. The Company also had 89 casual-dining102 franchised full-service restaurants operated by franchisees in 16 states and one Canadian province as of December 30, 2018.29, 2019. 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.
The Company’sCompany's fiscal year ends on the last Sunday of each calendar year. Most of our fiscal years have 52 weeks; however, we experience a fifty-third53rd week once every five orto six years. Our discussiondiscussions for fiscal yearyears 2019 and 2018 which ended on December 30, 2018, refersboth refer to a 52-week period. Our discussion for52 week fiscal year 2017, which ended on December 31, 2017, refers to a 53-week period, with the fifty-third week occurring in the fourth quarter. Our discussion for fiscal year 2016, which ended on December 25, 2016, refers to a 52-week period. In fiscal year 2017, the fifty-third week comprised $32.6 million of restaurant revenue and approximately $4.1 million of net income.years.
Financial and Operational Highlights
The following summarizes the financial and operational highlights of 2018 and our 2019 outlook:during the fifty-two weeks ended December 29, 2019:
Financial Performance.performance.
| |
| ◦ | Restaurant revenue decreased $48.9$26.7 million, or 3.6%2.0%, to $1.3 billion for the 52 weeks ended December 30, 201829, 2019, as compared to $1.4 billion for the 5352 weeks ended December 31, 2017. The decrease was primarily30, 2018, due to a $33.7$20.2 million decrease from closed restaurants and a $7.7 million, or 2.6%0.6%, decrease in comparable restaurant revenue, a $32.6 million decrease related to the additional revenue in the first week of 2017 (which had 53 weeks), and a $5.3 million decrease from closed restaurants,partially offset by a $22.7$1.2 million increase from newly opened restaurants. In 2019, the Company expects comparable restaurant sales growthrestaurants in their first full year of 0 to 150 basis points, and increased operating weeks associated with locations opened in 2018.operations. |
| |
| ◦ | Restaurant operating costs, as a percentage of restaurant revenue, increased 140110 basis points to 81.0% in 201882.1% for the 52 weeks ended December 29, 2019, as compared to 79.6% in 2017.81.0% for the 52 weeks ended December 30, 2018. The increase was primarily due to highera 70 basis point increase in labor costs and a 70 basis point increase in other operating costs, occupancy costs, and food and beverage costs, as a percentage of restaurant revenue, and was partially offset by a reduction30 basis point decrease in labor costs as a percentagecost of restaurant revenue.sales. |
| |
| ◦ | Net loss was $6.4$7.9 million in 2018, a decrease of $36.4 millionfor the 52 weeks ended December 29, 2019 compared to net incomeloss of $30.0$6.4 million in 2017. The additional week in 2017 contributed approximately $4.1 million to net income infor the prior year.52 weeks ended December 30, 2018. Diluted loss per share was $0.49 in 2018 as compared to diluted earnings per share of $2.31 in 2017. Excluding$0.61 for the impact of $1.60 per diluted share related to asset impairment, $0.27 per diluted share related to litigation contingencies, $0.18 per diluted share related to reorganization costs, and $0.17 per diluted share related to smallwares disposal, net income per diluted share in 2018 was $1.73. Excluding the impact of a $0.40 per diluted share related to asset impairment, which was partially offset by a benefit of $0.22 per diluted share related to deferred tax liability remeasurement due to tax reform, net income per diluted share in 2017 was $2.49.52 weeks ended |
December 29, 2019, as compared to diluted loss per share of $0.49 for the 52 weeks ended December 30, 2018. Excluding costs per diluted share included in Other charges of $0.86 for asset impairment, $0.19 for executive transition and severance, $0.19 for board and stockholder matter costs, $0.06 for executive retention, and a gain of $0.07 for restaurant closures and refranchising, adjusted earnings per diluted share for the 52 weeks ended December 29, 2019 was $0.62. Excluding charges per diluted share of $1.60 for asset impairment, $0.27 for litigation contingencies, $0.18 for reorganization costs, and $0.17 for smallwares disposal, adjusted earnings per diluted share for the 52 weeks ended December 30, 2018 was $1.73. We believe the non-GAAP measure of adjusted earnings per share gives the reader additional insight into the ongoing operational results of the Company, and it is intended to supplement the presentation of the Company’s financial results in accordance with GAAP.
Marketing. Our Red Robin Royalty™ loyalty program operates in all of our U.S. and Canada Company-owned Red Robin restaurants and has been rolled out to most of our franchised restaurants. We engage our Guests through Red Robin Royalty with offers designed to increase frequency of visits as a key part of our overall marketing strategy. We also inform enrolled Guests early about new menu items to generate awareness and trial.trial of these offerings. Our media buying approach is concentrated on generating significant reach and frequency while on-air. In addition, we use digital, social, and earned media to target and more effectively reach specific segments of our guestGuest base. Our new "All the Fulls" omni-channel marketing campaign launched in 2019 focuses heavily on increased social and digital marketing techniques and the brand's emotional connection with Guests.
2020 Outlook and Beyond
Restaurant Development.We developed a compelling plan to quickly drive improved Guest experiences, business performance, and stockholder value as discussed in Item I, During 2018, we opened eight Company-owned Red Robin restaurants,Business; our plan includes the following four fundamental elements: Recapture Our Soul, Deliver the Brand Promise, Tell Our Story, and relocated one Red Robin restaurant. During 2019, we will pauseAccelerate Profitable Growth. Based on new corporatethis strategy, the Company currently expects the following in 2020:
Comparable restaurant revenue growth developmentin the low single digits;
Incremental restaurant-level operating profit expected to be offset by pre-opening expenses, marketing, and project expenses associated with growth initiatives;
Net income of at least $2 million, including a tax benefit of $10 million to $12 million;
Adjusted EBITDA, a non-GAAP financial measure, of at least flat compared to approximately $101 million in 2019; and
Capital expenditures of $50 million to $60 million, including the restaurant support center and systems; restaurant maintenance, refreshes and remodels; introduction of Donatos®; technology; and other investments to support growth initiatives.
Guidance Policy
The Company provides guidance as we execute our long-term strategy which includes developing new restaurant prototypical designs in 2019.it relates to selected information related to the Company’s financial and operating performance, and such measures may differ from year to year.
Restaurant Data
The following table details restaurant unit data pertaining to the number offor our Company-owned and franchised locations for the periods indicated: |
| | | | | | |
| | | Year Ended |
| | | December 29, 2019 | | December 30, 2018 |
| Company-owned: | | | | |
| Beginning of period | | 484 |
| | 480 |
|
Opened during the period(1) | | — |
| | 8 |
|
Sold to franchisee(2) | | (12 | ) | | — |
|
| Closed during the period | | (18 | ) | | (4 | ) |
| End of period | | 454 |
| | 484 |
|
| Franchised: | | | | |
| Beginning of period | | 89 |
| | 86 |
|
| Opened during the period | | 1 |
| | 3 |
|
Acquired from corporate(2) | | 12 |
| | — |
|
| Closed during the period | | — |
| | — |
|
| End of period | | 102 |
| | 89 |
|
| Total number of restaurants | | 556 |
| | 573 |
|
(1) The restaurants foropened during the fiscal years 2018, 2017, and 2016.presented consisted entirely of completed new restaurant openings.
(2) During the fourth quarter of 2019, the Company sold 12 restaurants located in British Columbia, Canada to a franchise partner. |
| | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Company-owned: | | | | | | |
| Beginning of period | | 480 |
| | 465 |
| | 439 |
|
| Opened during the period | | 8 |
| | 18 |
| | 26 |
|
| Acquired from franchisee | | — |
| | — |
| | 13 |
|
| Closed during the period | | (4 | ) | | (3 | ) | | (13 | ) |
| End of period | | 484 |
| | 480 |
| | 465 |
|
| Franchised: | | | | | | |
| Beginning of period | | 86 |
| | 86 |
| | 99 |
|
| Opened during the period | | 3 |
| | 1 |
| | — |
|
| Sold or closed during the period | | — |
| | (1 | ) | | (13 | ) |
| End of period | | 89 |
| | 86 |
| | 86 |
|
| Total number of restaurants | | 573 |
| | 566 |
| | 551 |
|
Results of Operations
Operating results for each fiscal yearperiod 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 revenues:
|
| | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| | | (52 Weeks) | | (53 Weeks) | | (52 Weeks) |
| Revenues: | | | | | | |
| Restaurant | | 98.3 | % | | 98.4 | % | | 98.3 | % |
| Franchise royalties and fees | | 1.3 |
| | 1.3 |
| | 1.4 |
|
| Other revenue | | 0.4 |
| | 0.3 |
| | 0.3 |
|
| Total revenues | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Costs and expenses: | | | | | | |
| Restaurant operating costs (exclusive of depreciation and amortization shown separately below): | | | | | | |
| Cost of sales | | 23.8 |
| | 23.5 |
| | 23.3 |
|
| Labor | | 34.7 |
| | 34.8 |
| | 34.3 |
|
| Other operating | | 13.8 |
| | 13.1 |
| | 13.1 |
|
| Occupancy | | 8.7 |
| | 8.3 |
| | 8.4 |
|
| Total restaurant operating costs | | 81.0 |
| | 79.6 |
| | 79.1 |
|
| Depreciation and amortization | | 7.1 |
| | 6.7 |
| | 6.7 |
|
| Selling, general, and administrative | | 11.0 |
| | 11.3 |
| | 11.1 |
|
| Pre-opening and acquisition costs | | 0.2 |
| | 0.4 |
| | 0.6 |
|
| Other charges | | 2.9 |
| | 0.5 |
| | 3.0 |
|
| (Loss) income from operations | | (0.8 | ) | | 2.8 |
| | 0.9 |
|
| Other (income) expense: | | | | | | |
| Interest expense | | 0.8 |
| | 0.8 |
| | 0.6 |
|
| Interest income and other, net | | —% |
| | (0.1 | ) | | —% |
|
| Total other expenses | | 0.8 |
| | 0.7 |
| | 0.6 |
|
| (Loss) income before income taxes | | (1.6 | ) | | 2.1 |
| | 0.3 |
|
| Income tax (benefit) provision | | (1.1 | ) | | (0.1 | ) | | (0.5 | ) |
| Net (loss) income | | (0.5 | )% | | 2.2 | % | | 0.9 | % |
revenue. This information has been prepared on a basis consistent with our audited 2019 annual financial statements, with the exception of changes made due to the adoption of Topic 842 (Leases), 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. Certain percentage amounts in the table abovebelow do not total due to rounding as well as the fact that restaurant operating costs arebeing expressed as a percentage of restaurant revenuesrevenue and not total revenues.
Revenues
| | | (Revenues in thousands) | | 2018 | | 2017 | | 2018 - 2017 Percent Change | | 2016 | | 2017 - 2016 Percent Change | |
| | | | Year Ended |
| | | | December 29, 2019 | | December 30, 2018 |
| Revenues: | | | | | |
| Restaurant revenue | | $ | 1,316,209 |
| | $ | 1,365,060 |
| | (3.6 | )% | | $ | 1,280,669 |
| | 6.6 | % | | 98.1 | % | | 98.3 | % |
| Franchise revenue | | 17,409 |
| | 17,681 |
| | (1.5 | )% | | 17,955 |
| | (1.5 | )% | | 1.3 |
| | 1.3 |
|
| Other revenue | | 4,945 |
| | 4,825 |
| | 2.5 | % | | 4,563 |
| | 5.7 | % | | 0.6 |
| | 0.4 |
|
| Total revenues | | $ | 1,338,563 |
| | $ | 1,387,566 |
| | (3.5 | )% | | $ | 1,303,187 |
| | 6.5 | % | | 100.0 | % | | 100.0 | % |
Average weekly net sales volumes in Company-owned restaurants(1) | | $ | 52,303 |
| | $ | 54,522 |
| | (4.1 | )% | | $ | 53,851 |
| | 1.2 | % | |
| Total operating weeks | | 25,165 |
| | 25,038 |
| | 0.5 | % | | 23,799 |
| | 5.2 | % | |
| Net sales per square foot | | $ | 441 |
| | $ | 461 |
| | (4.3 | )% | | $ | 449 |
| | 2.7 | % | |
| | | | | | |
| Costs and expenses: | | | | | |
Restaurant operating costs (exclusive of depreciation and amortization shown separately below)(1) | | | | | |
| Cost of sales | | | 23.5 | % | | 23.8 | % |
| Labor | | | 35.4 |
| | 34.7 |
|
| Other operating | | | 14.5 |
| | 13.8 |
|
| Occupancy | | | 8.7 |
| | 8.7 |
|
| Total restaurant operating costs | | | 82.1 |
| | 81.0 |
|
| Depreciation and amortization | | | 7.0 |
| | 7.1 |
|
| Selling, general and administrative | | | 11.9 |
| | 11.0 |
|
| Pre-opening and acquisition costs | | | — |
| | 0.2 |
|
| Other charges | | | 1.6 |
| | 2.9 |
|
| (Loss) from operations | | | (1.0 | ) | | (0.8 | ) |
| Other (income) expense: | | | | | |
| Interest expense | | | 0.8 |
| | 0.8 |
|
| Interest (income) and other, net | | | (0.1 | ) | | — |
|
| Total other expenses | | | 0.7 |
| | 0.8 |
|
| (Loss) before income taxes | | | (1.7 | ) | | (1.6 | ) |
| Income tax benefit | | | (1.1 | ) | | (1.1 | ) |
| Net loss | | | (0.6 | )% | | (0.5 | )% |
| |
(1) | Calculated using constant currency rates. Using historical currency rates, the average weekly sales per unit for fiscal years 2017 and 2016 for Company-owned restaurants was $54,520 and $53,812. The Company calculates non-GAAP constant currency average weekly sales per unit by translating prior year local currency average weekly sales per unit to U.S. dollars based on current quarter average exchange rates. The Company considers non-GAAP constant currency average weekly sales per unit to be a useful metric to investors and management as they facilitate a more useful comparison of current performance to historical performance. |
(1) Expressed as a percentage of restaurant revenue rather than total revenue
|
| | | | | | | | | | | |
| | | Year Ended |
| (Revenues in thousands) | | 2019 | | 2018 | | Percent Change |
| Restaurant revenue | | $ | 1,289,521 |
| | $ | 1,316,209 |
| | (2.0 | )% |
| Franchise revenue | | 17,497 |
| | 17,409 |
| | 0.5 | % |
| Other revenue | | 7,996 |
| | 4,945 |
| | 61.7 | % |
| Total revenues | | $ | 1,315,014 |
| | $ | 1,338,563 |
| | (1.8 | )% |
| Average weekly sales volumes in Company-owned restaurants | | $ | 52,193 |
| | $ | 52,216 |
| |
|
|
| Total operating weeks | | 24,707 |
| | 25,165 |
| | (1.8 | )% |
| Net sales per square foot | | $ | 439 |
| | $ | 441 |
| | (0.5 | )% |
Restaurant revenue, which comprises almost entirelyprimarily food and beverage sales, decreased by $48.9$26.7 million or 3.6%, for the 52 weeksweek fiscal year ended December 30, 201829, 2019, or 2.0%, as compared to the 53 weeks in 2017.52 week fiscal year ended December 30, 2018. The decrease was primarily due to a $33.7$20.2 million decrease from closed restaurants, and a $7.7 million, or 2.6%0.6%, decrease in comparable restaurant revenue, a $32.6 million decrease related to the additional revenue in the first week of 2017 (which had 53 weeks), and a $5.3 million decrease from closed restaurants,partially offset by a $22.7$1.2 million increase in revenue from newly opened restaurants.restaurants in their first full year of operations. The comparable restaurant revenue decrease was driven by a 1.5%4.7% decrease in guest counts, and a 1.1% decrease in average guest check. The decrease in average guest check resulted from a 0.8% increase in pricing offset by a 1.9% decrease in menu mix.
Restaurant revenue increased by $84.4 million, or 6.6%, for the 53 weeks ended December 31, 2017 as compared to the 52 weeks in 2016. The additional week in 2017 contributed approximately $29.8 million in restaurant revenue. The remaining increase was primarily due to a $57.0 million increase in revenue from newly opened restaurants and a $8.1 million, or 0.7%, increase in comparable restaurant revenue,Guest count partially offset by a $10.5 million decrease from closed restaurants. The comparable restaurant revenue increase was driven by a 0.4% increase in guest counts, a 0.2%4.1% increase in average guest check, and a 0.1% favorable foreign exchange impact related to our Canadian restaurants.Guest check. The increase in average guestGuest check resulted fromcomprised a 1.9%2.1% increase in pricing, offset by a 1.7% decreaseincrease in menu mix.mix primarily driven by the Company’s current menu and promotional strategy, resulting in lower Tavern burger sales and higher Gourmet and Finest burger sales, and a 0.3% increase from lower discounting in 2019 compared to 2018.
We are implementing a series of new strategic initiatives; (i) enhancing our brand promise of memorable moments of connection with our Guests, (ii) leveraging service model improvements and technology, and undertaking menu rationalization efforts in order to improve our dine-in experience, (iii) telling our story via consumer driven omni-channel messaging focused on our brand, and (iv) enhancing our focus on areas of profitable growth, including growing and enhancing our off-premise business, and our roll out of Donatos®, a high quality pizza brand "nested" inside of Red Robin restaurants that is expected to drive incremental top-line sales and gross margin. Our strategic initiatives serve to develop our brand, while enhancing the value proposition Red Robin provides to its dine-in and off-premise Guests; we believe our initiatives will drive increased Guest counts, incremental margin growth, and increased comparable restaurant revenue.
Average weekly sales volumes represent the total restaurant revenue for all Company-owned Red Robin casual dining restaurants for each time period presented, divided by the number of operating weeks in the period. Comparable restaurant revenues include those restaurants that are in the comparable base at the end of each period presented. New restaurants are restaurants that are open but by definition are not included in the comparable category because they have not operated for five full quarters. Fluctuations in average weekly net sales volumes for Company-owned restaurants reflect the effect of comparable restaurant revenue changes as well as the performance of new and acquired restaurants during the period and the average square footage of our restaurants.
Franchise revenues comprise primarily royalty income and advertising fund contributions. Franchise revenues decreased $0.3revenue increased $0.1 million, or 1.5%0.5%, from 2017, primarily relatedduring the 52 week fiscal year ended December 29, 2019 compared to the decrease of $0.2 million52 week fiscal year ended December 30, 2018 primarily due to a 0.8% increase in comparable franchise restaurant revenue, driving an increase in franchise royalties related to the additional week in 2017. Our franchisees reported that comparable restaurant revenue decreased 0.2% in 2018 as compared to 2017. The decrease in franchise royaltiesfees and fees in 2017 from 2016 is primarily related to the loss of royalties from 13 franchised restaurants that we acquired in 2016. The decrease was partially offset by the additional week in 2017 which contributed $0.2 million in franchiselicensing royalties. Our franchisees reported that comparable restaurant revenue decreased 1.6% in 2017 as compared to 2016.
Other revenue comprises primarily of gift card "breakage"breakage, which represents the value associated with the portion of gift cards sold that will most likely never be redeemed, and licensing royalties. For the fiscal years ended December 29, 2019 and December 30, 2018, December 31, 2017, and December 25, 2016, we recognized $3.9 million, $4.0$6.8 million and $3.5$3.9 million of gift card breakage.
breakage, respectively.
Cost of Sales
| | | (In thousands, except percentages) | | 2018 | | 2017 | | 2018 - 2017 Percent Change | | 2016 | | 2017 - 2016 Percent Change | | 2019 | | 2018 | | Percent Change |
| Cost of sales | | $ | 313,504 |
| | $ | 320,355 |
| | (2.1 | )% | | $ | 298,249 |
| | 7.4 | % | | $ | 303,404 |
| | $ | 313,504 |
| | (3.2 | )% |
| As a percent of restaurant revenue | | 23.8 | % | | 23.5 | % | | 0.3 | % | | 23.3 | % | | 0.2 | % | | 23.5 | % | | 23.8 | % | | (0.3 | )% |
Cost of sales, which comprises food and beverage costs, is variable and generally fluctuates with sales volume. Cost of sales as a percentage of restaurant revenue increaseddecreased 30 basis points in 20182019 as compared to 2017.the same period in 2018. The increasedecrease was primarily driven by higher prices for potatoes,favorable pork and steak fry costs, partially offset by lowerunfavorable ground beef and produce prices.costs.
Cost of sales as a percentage of restaurant revenue increased 20 basis points in 2017 compared to 2016. The increase was primarily driven by higher prices for ground beef, potatoes, and seafood, partially offset by lower poultry prices.
Labor
| | | (In thousands, except percentages) | | 2018 | | 2017 | | 2018 - 2017 Percent Change | | 2016 | | 2017 - 2016 Percent Change | | 2019 | | 2018 | | Percent Change |
| Labor | | $ | 456,262 |
| | $ | 475,432 |
| | (4.0 | )% | | $ | 439,232 |
| | 8.2 | % | | $ | 456,778 |
| | $ | 456,262 |
| | 0.1 | % |
| As a percent of restaurant revenue | | 34.7 | % | | 34.8 | % | | (0.1 | )% | | 34.3 | % | | 0.5 | % | | 35.4 | % | | 34.7 | % | | 0.7 | % |
Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits. In 2018, labor as a percentage of restaurant revenue decreased 10 basis points compared to 2017. This decrease was primarily driven by labor model changes, partially offset by an increase in management salaries, training costs, and minimum wage increases in certain states.
In 2017, laborLabor as a percentage of restaurant revenue increased 5070 basis points in 2019 compared to 2016. Thisthe same period in 2018. The increase was primarily driven by increases in management bonushigher average wage rates and increases inincreased manager staffing levels within the minimum wages in certain states, partially offset by a decrease in insurance and training costs.
Other Operating
| | | (In thousands, except percentages) | | 2018 | | 2017 | | 2018 - 2017 Percent Change | | 2016 | | 2017 - 2016 Percent Change | | 2019 | | 2018 | | Percent Change |
| Other operating | | $ | 182,084 |
| | $ | 178,309 |
| | 2.1 | % | | $ | 167,727 |
| | 6.3 | % | | $ | 186,476 |
| | $ | 182,084 |
| | 2.4 | % |
| As a percent of restaurant revenue | | 13.8 | % | | 13.1 | % | | 0.7 | % | | 13.1 | % | | — | % | | 14.5 | % | | 13.8 | % | | 0.7 | % |
Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs. During 2018, othercosts including royalties paid to Donatos®. Other operating costs as a percentage of restaurant revenue increased 70 basis points in 2019 as compared to the prior year, assame period in 2018. The increase was primarily due to higher costs of third-party delivery fees,expense driven by growth in off-premise sales, as well as an increase in restaurant technology, restaurant supplies, and utility costs were offset by lower janitorial costs.
During 2017, other operating costs as a percentage of restaurant revenue were flat compared to the prior year, as higher costs of third-party delivery fees and restaurant technology were offset by lower costs for equipment repairs and maintenance and utilities.
Occupancy
| | | (In thousands, except percentages) | | 2018 | | 2017 | | 2018 - 2017 Percent Change | | 2016 | | 2017 - 2016 Percent Change | | 2019 | | 2018 | | Percent Change |
| Occupancy | | $ | 114,146 |
| | $ | 112,753 |
| | 1.2 | % | | $ | 107,408 |
| | 5.0 | % | | $ | 111,798 |
| | $ | 114,146 |
| | (2.1 | )% |
| As a percent of restaurant revenue | | 8.7 | % | | 8.3 | % | | 0.4 | % | | 8.4 | % | | (0.1 | )% | | 8.7 | % | | 8.7 | % | | —% |
|
Occupancy costs include fixed rents, property taxes, common area maintenance charges, general liability insurance, contingent rents, and other property costs. Occupancy costs incurred prior to opening our new restaurants are included in pre-opening costs. In 2018,For the year ended December 29, 2019, occupancy costs as a percentage of restaurant revenue increased 40 basis pointsremained flat compared to the prior year. The increase was primarily due to sales deleverage, partially offset by a decreasesame period in general liability insurance. 2018.
Our fixed rents for the fiscal years ended December 29, 2019 and December 30, 2018 were $73.9 million and December 31, 2017 were $76.6 million and $76.1 million, an increase
respectively, a decrease of $0.5$2.7 million due to 25a net decrease in restaurant count resulting from 18 locations opened and acquired sincepermanently closed during the beginning of 2017.
In 2017, occupancy costs as a percentage of restaurant revenue decreased 10 basis points over the prior year, primarily due to sales deleverage, partially offset by an increase in general liability insurance. Our fixed rents for the fiscal years ended December 31, 2017 and December 25, 2016 were $76.1 million and $71.9 million, an increase of $4.2 million due to 41 locations opened and acquired since 2016.
Depreciation and Amortization
| | | (In thousands, except percentages) | | 2018 | | 2017 | | 2018 - 2017 Percent Change | | 2016 | | 2017 - 2016 Percent Change | | 2019 | | 2018 | | Percent Change |
| Depreciation and amortization | | $ | 95,371 |
| | $ | 92,545 |
| | 3.1 | % | | $ | 86,695 |
| | 6.7 | % | | $ | 91,790 |
| | $ | 95,371 |
| | (3.8 | )% |
| As a percent of total revenues | | 7.1 | % | | 6.7 | % | | 0.4 | % | | 6.7 | % | | — | % | | 7.0 | % | | 7.1 | % | | (0.1 | )% |
Depreciation and amortization includes depreciation on capital expenditures for restaurants and corporate assets as well as amortization of acquired franchise rights, leasehold interests, and certain liquor licenses. In 2018,For the year ended December 29, 2019, depreciation and amortization increased $2.8 million, or 3.1%,expense as a percentage of revenue remained flat compared to 2017, primarily related to new restaurants opened since 2017.
In 2017, depreciation and amortization increased $5.9 million, or 6.7%, compared to 2016, primarily related to new restaurants opened and acquired since 2016 and restaurants remodeled under our brand transformation initiative since 2016.
Selling, General, and Administrative
| | | (In thousands, except percentages) | | 2018 | | 2017 | | 2018 - 2017 Percent Change | | 2016 | | 2017 - 2016 Percent Change | | 2019 | | 2018 | | Percent Change |
| Selling, general, and administrative | | $ | 146,458 |
| | $ | 156,656 |
| | (6.5 | )% | | $ | 144,633 |
| | 8.3 | % | | $ | 155,978 |
| | $ | 146,458 |
| | 6.5 | % |
| As a percent of total revenues | | 11.0 | % | | 11.3 | % | | (0.3 | )% | | 11.1 | % | | 0.2 | % | | 11.9 | % | | 11.0 | % | | 0.9 | % |
Selling, general, and administrative costs include all corporate and administrative functions. Components of this category include:include marketing and advertising costs; corporate, 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; and corporate, regional, and franchise support salaries and benefits.
Selling, general, and administrative costs in 2018 decreased $10.2 million, or 6.5%, as compared to 2017. The decrease was primarily due to decreases in incentive compensation, salaries related to the reorganization in first quarter 2018, and advertisingdirectors' expenses.
Selling, general, and administrative costs in 2017 increased $12.0$9.5 million, or 8.3%,6.5% in 2019 as compared to 2016.the same period in 2018. The increase was primarily due to an increase in advertising, incentive compensation, travel and entertainment, andinterim CEO expenses, increased Team Member benefits, increased professional services costs partially offset byand higher salaries.national media spend to support the launch of the Company's new creative brand campaign.
Pre-opening and Acquisition Costs
| | | (In thousands, except percentages and restaurant openings) | | 2018 | | 2017 | | 2018 - 2017 Percent Change | | 2016 | | 2017 - 2016 Percent Change | |
Pre-opening and acquisition costs(1) | | $ | 2,092 |
| | $ | 5,570 |
| | (62.4 | )% | | $ | 8,025 |
| | (30.6 | )% | |
| (In thousands, except percentages) | | | 2019 | | 2018 | | Percent Change |
| Pre-opening costs | | | $ | 319 |
| | $ | 2,092 |
| | (84.8 | )% |
| As a percent of total revenues | | 0.2 | % | | 0.4 | % | | (0.2 | )% | | 0.6 | % | | (0.2 | )% | | —% |
| | 0.2 | % | | * |
|
| | | | | | | | |
| Number of restaurants opened during year | | 8 |
| | 18 |
| | (55.6 | )% | | 26 |
| | (30.8 | )% | | — |
| | 8 |
| | * |
|
| Average per restaurant pre-opening costs | | $ | 262 |
| | $ | 309 |
| | (15.2 | )% | | $ | 281 |
| | 10.0 | % | | $ | — |
| | $ | 262 |
| | * |
|
| * Percentage increases and decreases over 100 percent were not considered meaningful. | | * Percentage increases and decreases over 100 percent were not considered meaningful. |
| |
(1) | Acquisition costs in 2016 related to the acquisition of 13 Red Robin franchised restaurants in the United States totaled $0.7 million. |
Pre-opening costs, which are expensed as incurred, consist of:comprise the costs of labor, hiring, and training the initial work force for our new restaurants and new initiatives; occupancy costs incurred prior to opening,opening; travel expenses for our training teams, supply costs,teams; the cost of food and beverages used in training,training; licenses and marketing,marketing; supply costs; and other direct costs related to the opening of new restaurants. Average per restaurantOur pre-opening costs represents totalfluctuate from period to period, depending upon, but not limited to, the number of restaurant openings, the size of the restaurants being opened, and the location of the restaurants. Pre-opening costs incurred for thoseany given quarter will typically include expenses associated with restaurants that opened for business during the periods presented.quarter as well as expenses related to restaurants opening in subsequent quarters. Costs related to preparing restaurants to introduce Donatos® will be expensed as incurred and included in pre-opening costs
Pre-opening costs in 2019 decreased $1.8 million as compared to the same period in 2018. The decrease was due to no new restaurant openings during 2019 as compared to eight new restaurant openings during the same period in 2018.
Other Charges
|
| | | | | | | | | | | |
| (In thousands, except percentages) | | 2019 | | 2018 | | Percent Change |
| Asset impairment | | $ | 15,094 |
| | $ | 28,127 |
| | (46.3 | )% |
| Executive transition and severance | | 3,450 |
| | — |
| | * |
|
| Board and stockholder matter costs | | 3,261 |
| | — |
| | * |
|
| Executive retention | | 980 |
| | — |
| | * |
|
| Restaurant closures and refranchising | | (1,187 | ) | | — |
| | * |
|
| Litigation contingencies | | — |
| | 4,795 |
| | * |
|
| Reorganization costs | | — |
| | 3,273 |
| | * |
|
| Smallwares disposal | | — |
| | 2,936 |
| | * |
|
| Other charges | | $ | 21,598 |
| | $ | 39,131 |
| | |
| | | | | | | |
| * Percentage increases and decreases over 100 percent were not considered meaningful. |
During 2019, the Company determined 29 Company-owned restaurants were impaired and recognized a non-cash impairment charge of $15.1 million. During 2018, we determined that 41 Company-owned restaurants were impaired, 19 of which had immaterial impairments. We recognized a non-cash impairment charge of $28.1 million as a result of the current and projected future results of these restaurants. During 2017, we determined that 13 Company-owned restaurants were impaired and recognized a non-cash impairment charge of $6.9 million. During 2016, we determined that 19 Company-owned restaurants were impaired and recognized a non-cash impairment charge of $24.4 million. The Company reviewed each restaurant’s past and present operating performance combined with projected future results, primarily through projected undiscounted cash flows, which indicated impairment. The carrying amount of each restaurant was compared to its estimated fair value as determined by management. The impairment charge represents the excess of each restaurant’s carrying amount over its estimated fair value. The fair value measurement for asset impairment is based on significant inputs not observed in the market and thus represents a level 3 fair value measurement.
During 2018, the Company recognized pre-tax litigation costs of $4.8 million. During 2016, the Company recognized pre-tax litigation costs of $3.9 million.
The Company also recognized a $0.8 million asset impairment charge due to the relocation of a restaurant during 2016.
During the fourth quarter of 2016, the Company determined certain software related to its Enterprise Resource Planning (“ERP”) system would be obsolete upon migration to a cloud-based ERP system in 2017. The Company also determined certain software in development for supply chain management would not meet the Company’s requirements if it were implemented. As a result, the Company recorded a $2.5 million impairment charge to write down the capitalized costs associated with this software.
During 2016, the Company closed nine Red Robin Burger Works restaurants, smaller non-traditional prototypes with limited menu and limited service,For further information on Other Charges line items that were underperforming relative to Company expectations and recognized $6.7 million of restaurant closure costs. Refernot comparable, refer to Note 4, Other Charges., of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report
Interest Expense
Interest expense in 2019 and 2018 2017,was $10.2 million and 2016 was $10.7 million, $11.0 million, and $7.2 million.respectively. Interest expense decreased in 2019 compared to the same period in 2018 primarily due to a lower weighted average outstanding debt balance partially offset by a higher weighted average interest rate. Our weighted average interest rate in 2019 and 2018 was 4.2%5.1% and 3.7%4.2%, respectively.
Income Tax Benefit
Income tax benefit was $14.3 million in 2018 and 2017. Interest expense increased in 2017 primarily due2019, compared to increased rates on our revolving line. Our weighted average interest rate was 3.7% and 2.4% in 2017 and 2016.
(Benefit) for Income Taxes
Thean income tax benefit from income taxes wasof $15.0 million in 2018 compared to a benefit from income taxes of $1.0 million in 2017 and a benefit for income taxes of $6.9 million in 2016.2018. Our effective income tax rate was a 64.5% benefit in 2019 and a 70.0% benefit in 2018, 3.5% benefit in 2017, and 144.9% benefit in 2016.2018. The decrease in the Company's 2019 effective tax expense in 2018 compared to 2017benefit is primarily attributable to thea decrease in earnings before income tax as well as the decrease in the federal statutory rate from 35% to 21% beginning in 2018. The decrease in our 2017 effective tax rate compared to 2016 was primarily attributable to an increase in earnings before income tax as well ascredits and an increase in the FICA tip tax credit.valuation allowance primarily driven by closing and refranchising all remaining company-operated restaurants in Canada in the fourth quarter of 2019.
Liquidity and Capital Resources
General
Cash and cash equivalents increased $0.9$11.5 million to $30.1 million at December 29, 2019, from $18.6 million at December 30, 2018, from $17.7 million at December 31, 2017. This increase in our cash position was primarily the net result of:
$126.3 millionbeginning of cash provided by operating activities;
$50.3 million used for the construction of new restaurants, expenditures for facility improvements, and investments in information technology; and
$73.7 million in net repayments on our credit facility and payments on capital leases.
fiscal year. We expect to continue to reinvest available cash flows from operations to invest inpay down debt, maintain existing restaurants and infrastructure, pay down debt,make disciplined investment in growth projects, and executerepurchase our long-term strategic initiatives.
We intendcommon stock. The Company plans to reinvest earnings from our restaurants in our Canadian subsidiariesuse at least 50% of available cash flows for ongoing de-leveraging of the foreseeable future. We have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs and, accordingly, we do not provide for U.S. federal income and foreign withholding tax on these earnings.business.
Cash Flows
The table below summarizes our cash flows from operating, investing, and financing activities for each of the past three fiscal yearsperiod presented (in thousands):
|
| | | | | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Net cash provided by operating activities | | $ | 126,295 |
| | $ | 156,607 |
| | $ | 98,957 |
|
| Net cash used in investing activities | | (49,836 | ) | | (83,290 | ) | | (199,379 | ) |
| Net cash (used in) provided by financing activities | | (74,298 | ) | | (67,924 | ) | | 89,333 |
|
| Effect of exchange rate changes on cash and cash equivalents | | (1,306 | ) | | 589 |
| | 116 |
|
| Net increase (decrease) in cash and cash equivalents | | $ | 855 |
| | $ | 5,982 |
| | $ | (10,973 | ) |
|
| | | | | | | | |
| | | 2019 | | 2018 |
| Net cash provided by operating activities | | $ | 57,915 |
| | $ | 126,295 |
|
| Net cash used in investing activities | | (57,030 | ) | | (49,836 | ) |
| Net cash provided by (used) in financing activities | | 9,678 |
| | (74,298 | ) |
| Effect of currency translation on cash | | 913 |
| | (1,306 | ) |
| Net increase in cash and cash equivalents | | $ | 11,476 |
| | $ | 855 |
|
Operating Cash Flows
Net cash flows provided by operating activities decreased $68.4 million to $57.9 million in 2019 as compared to 2018. The changes in net cash provided by operating activities decreased $30.3 millionare primarily attributable to $126.3 million in 2018. The decrease was primarily driven by a $27.3$19.2 million decrease in cash generatedprofit from operations a $10.3 million increasecompared to the same period in bonus payout, a $3.3 million increase in reorganization costs; partially offset by a $5.4 million returned vendor deposit, a $3.3 million decrease in corporate salaries, and a $1.5 million decrease in income tax payments.
Net cash provided by operating activities increased $57.7 million to $156.6 million in 2017. The increase was primarily2018, as well as changes driven by a $44.0 million decreaseOther charges (See Note 4, Other Charges, in Item 8 of Part II in this report) and timing of payments related to timing of vendor payments due to a system conversion at the end of 2016, a $9.7 million increase in cash generated from restaurant operations, a $3.6 million decrease in corporate salariesour operating assets and benefits, and a $0.7 million decrease in income tax payments.liabilities.
Investing Cash Flows
Net cash flows used in investing activities decreased $33.5increased $7.2 million from $83.3to $57.0 million in 20172019 as compared to $49.8 million in 2018. The decreaseincrease was primarily due to decreasedincreased investment in restaurant remodels and new restaurant technology partially offset by a decrease in restaurant openings in 2018. during the year and lower restaurant maintenance capital expenditures.
The following table lists the components of our capital expenditures, net of currency translation effect, for 2018the fiscal year ended December 29, 2019 (in thousands):
|
| | | |
| Year Ended December 30, 2018 |
| Restaurant maintenance capital | $ | 26,781 |
|
| Investment in technology infrastructure and other | 13,983 |
|
| New restaurants | 9,507 |
|
| Total capital expenditures | $ | 50,271 |
|
Net cash flows used in investing activities decreased $116.1 million from $199.4 million in 2016 to $83.3 million in 2017. The decrease was primarily due to the acquisition of franchised restaurants in 2016, along with decreased investment in restaurant remodels and new restaurant openings in 2017.
In 2019, capital expenditures are expected to be between $50 million and $60 million, including corporate office, systems, maintenance, and restaurant refresh capital, and technology, equipment, and other investments to support growth initiatives. |
| | | | | | | |
| | 2019 | | 2018 |
| Investment in technology infrastructure and other | $ | 39,202 |
| | $ | 13,983 |
|
| Restaurant maintenance capital and other | 17,288 |
| | 26,781 |
|
| New restaurants | — |
| | 9,507 |
|
| Restaurant remodels and refreshes | 819 |
| | — |
|
| Total capital expenditures | $ | 57,309 |
| | $ | 50,271 |
|
Financing Cash Flows
Cash used in ourNet cash flows provided by financing activities increased $6.4$84.0 million to $74.3$9.7 million in 2019 as compared to 2018. ThisThe increase primarily resulted from $3.1a $86.2 million increase in net paymentsborrowings of long-term debt, a $2.5 million decrease in proceeds from exercise of stock options, and a $1.5 million increase in cash used to repurchase the Company’s common stock, partially offset by a $0.7an increase of $2.0 million decrease in debt issuance costs.
Cash used in our financing activities increased $157.3 million to $67.9 million in 2017. This increase was primarily due to a $203.5 million decrease in net debt borrowings, partially offset by a $46.1 million decrease inof cash used to repurchase the Company’s common stock.
Credit Facility
Credit Facility.On June 30, 2016, we replaced the credit facility that weCompany entered into in 2014 with a new credit facility (the “New Credit“Credit Facility”) with the same group of lenders. The New Credit Facility, which provides for a $400 million revolving line of credit with a sublimit for the issuance of up to $25 million in letters of credit and swingline loans up to $15 million, and includes an option to increase the amount available under the credit facility up to an additional $100 million in the aggregate, subject to the lenders’ participation.
The New Credit Facility also provides a Canadian Dollar borrowing sublimit equivalent to $20$15.0 million. Borrowings under the New Credit Facility, if denominated in U.S. Dollars, are subject to rates based on the London Interbank Offered Rate (“LIBOR”) plus a spread based on leverage, or a base rate plus a spread based on leverage (base rate is the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50%, and (c) LIBOR for an Interest Period of one month plus 1%). Borrowings under the New Credit Facility, if denominated in Canadian Dollars, are subject to rates based on LIBOR plus a spread based on leverage, or a base rate plus a spread based on leverage (base rate is the highest of (a) the Canadian Prime Rate and (b) the Canadian Dealer Offered Rate (“CDOR Rate”) for an interest period of one month plus 1%). On April 13, 2017,August 19, 2019, the Company entered into a firstsecond amendment (the “Amendment”) to the New Credit Facility. The Amendment increased the lease adjusted leverage ratio to 5.25x5.0 through October 1, 2017December 29, 2019 before stepping down to 5.0x through July 15, 2018 and returning to 4.75x4.75 thereafter. TheIn addition, the Amendment also provides for additional pricing tiers that increase LIBOR spread rates and commitment feesrevised the definition of permitted acquisitions under the Credit Facility to correspond
with the extentchange to the Company’s lease adjusted leverage ratio exceeds 4.75x,and clarified the classification of existing capital and operating leases. The Company's lease adjusted leverage ratio was 4.72 as of December 29, 2019. The lease adjusted leverage ratio is defined in additionSection 1.1 of the Credit Facility, which is filed as Exhibit 10.1 to revising terms for permitted acquisitions and investments under the New Credit Facility. TheCompany's Current Report on Form 8-K filed with the SEC on July 5, 2016, as further amended by the Amendment was effective through October 7, 2018.filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on August 23, 2019.
The New Credit Facility matures on June 30, 2021. Borrowings underLoan origination costs associated with the New Credit Facility are secured by first priority liens and security interestsincluded as deferred costs in substantially all ofOther assets, net in the Company’s assets, including the capital stock of certain Company subsidiaries, and are available for financing activities including restaurant construction costs, working capital and general corporate purposes, including, among other uses, to refinance certain indebtedness, permitted acquisitions, and redemption of capital stock.accompanying consolidated balance sheets. As of December 30, 2018,29, 2019, the Company had outstanding borrowings under the New Credit Facility of $192.5$206.0 million, in addition to amounts issued under letters of credit of $7.8 million, which reduced$7.5 million. Amounts issued under letters of credit reduce the amount available under the New Credit Facility but are not recorded as debt. As of December 29, 2019, we had unused borrowing capacity under the Credit Facility of approximately $186.5 million.
Covenants.On January 10, 2020, the Company replaced its Credit Facility with a new five-year Amended and Restated Credit Agreement (the "New Credit Facility") which provides for a $161.5 million revolving line of credit and a $138.5 million term loan for a total borrowing capacity of $300 million. No amortization is required with the respect to the revolving line of credit, and the term loans require quarterly principal payments at a rate of 7.0% per annum of the original principal balance. The interest rates of the revolving line of credit and term loans are based on either LIBOR or a base rate defined by the agreement. LIBOR is set to terminate in December 2021, however, we anticipate an amended credit agreement will be executed at the new applicable interest rate. See Note 8, Borrowings, in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K for further discussion.
Covenants
We are subject to a number of customary covenants under the Newour Credit Facility, including limitations on additional borrowings, acquisitions, capital expenditures, stock repurchases, lease commitments,sales of assets, and dividend payments. We are also required to maintain two financial ratios. First, we are required to maintain a lease adjusted leverage ratio below 4.75x EBITDAR as of the end of 2018. Secondly, we are required to maintain a fixed charge coverage ratio minimum of 1.25x our fixed charges. As of December 30, 2018, our lease adjusted leverage ratio was 4.08x and our fixed charge coverage ratio was 1.87x. The lease adjusted leverage ratio, fixed charge coverage ratio, EBITDAR, and fixed charges are defined29, 2019, we were in Section 1.1 of the Credit Agreement for our New Credit Facility, which is filed as Exhibit 10.32 of this Annual Report on Form 10-K.compliance with all debt covenants.
Debt Outstanding.Outstanding
Total debt and capital lease obligations outstanding decreased $73.7increased $13.5 million to $203.6$206.9 million at December 29, 2019, from $193.4 million at December 30, 2018, from $277.3 million at December 31, 2017, primarily due to net repaymentsborrowings of $73.0$13.5 million on the New Credit Facility during 2018.2019.
Stock Repurchase.Share Repurchase
On August 9, 2018, the Company’s board of directors authorized an increase to the Company’s current share repurchase program of approximately $21 millionup to a total of $75 million of the Company’s common stock. The increased share repurchase authorization became effective on August 9, 2018, and will terminate upon completing repurchases of $75 million of common stock unless otherwise terminated by the board. Purchases underPursuant to the repurchase program, may be made in open market or privately negotiated transactions. Purchasespurchases may be made from time to time at the Company’s discretion and the timing and amount of any share repurchases will be determined based on share price, market conditions, legal requirements, and other factors. The repurchase program doesCompany is not obligate the Companyobligated to acquire any particular amount of common stock, andstock. From the Company may suspend or discontinuedate of the repurchasecurrent program at any time. In 2018, the Company purchased 42,600approval through December 29, 2019, we have repurchased a total of 154,400 shares withat an average purchase price of $34.61$31.90 per share for a totalan aggregate amount of $1.5$4.9 million. All stock repurchases in 2018 occurred afterAccordingly, as of December 29, 2019, we had $70.1 million of availability under the August 9, 2018 increase in authorization.
On February 11, 2016, the Company’s board of directors re-authorized the Company'scurrent share repurchase programprogram. Our ability to repurchase shares is limited to conditions set forth by our lenders in the Credit Facility and approvedNew Credit Facility.
Inflation
The primary inflationary factors affecting our operations are food costs, labor costs, energy costs, and costs of construction materials used in restaurant remodels and refreshes. A large number of our restaurant Team Members are paid at rates based on the repurchaseapplicable minimum wage and increases in the minimum wage rates have directly affected our labor costs in recent years. Many of upour leases require us to $100 millionpay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases. Labor cost inflation had a negative impact on our financial condition and results of operations during the Company’s common stock. In 2016,fiscal year ended December 29, 2019. Uncertainties related to fluctuations in costs, including energy costs, commodity prices, annual indexed or potential minimum wage increases, and construction materials make it difficult to predict what impact, if any, inflation may continue to have on our business, but it is anticipated inflation will continue to have a negative impact on labor costs in fiscal year 2020.
Seasonality
Our business is subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the Company repurchased 940,034 shares with an average purchase pricesummer months and winter holiday season and lower during the fall season. As a result, our quarterly operating results and comparable restaurant revenue may fluctuate significantly as a result of $49.02 per shareseasonality. Accordingly, results for a totalany one quarter are not necessarily indicative of $46.1 million.results to be expected for any other quarter, and comparable restaurant sales for any particular future period may decrease.
Contractual Obligations
Contractual Obligations.The following table summarizes the amounts of payments due under specified contractual obligations as of December 30, 201829, 2019 (in thousands):
| | | | | Payments Due by Period | | Payments Due by Period |
| | | Total | | 2019 | | 2020 - 2021 | | 2022 - 2023 | | 2024 and
Thereafter | | Total | | 2020 | | 2021 - 2022 | | 2023 - 2024 | | 2025 and Thereafter |
Long-term debt obligations(1) | | $ | 231,642 |
| | $ | 8,486 |
| | $ | 16,971 |
| | $ | 205,245 |
| | $ | 940 |
| | $ | 231,883 |
| | $ | 8,293 |
| | $ | 222,585 |
| | $ | 65 |
| | $ | 940 |
|
Capital lease obligations(2) | | 13,350 |
| | 1,234 |
| | 2,482 |
| | 2,082 |
| | 7,552 |
| |
Finance lease obligations(2) | | | 12,531 |
| | 1,065 |
| | 2,112 |
| | 1,848 |
| | 7,506 |
|
Operating lease obligations(3) | | 550,371 |
| | 80,367 |
| | 147,355 |
| | 115,770 |
| | 206,879 |
| | 739,777 |
| | 70,303 |
| | 149,692 |
| | 140,138 |
| | 379,644 |
|
Purchase obligations(4) | | 176,750 |
| | 101,934 |
| | 66,634 |
| | 8,182 |
| | — |
| | 162,282 |
| | 98,577 |
| | 63,705 |
| | — |
| | — |
|
Other non-current liabilities(5) | | 7,894 |
| | 2,256 |
| | 1,665 |
| | 1,818 |
| | 2,155 |
| | 7,233 |
| | 1,343 |
| | 2,302 |
| | 1,504 |
| | 2,084 |
|
| Total contractual obligations | | $ | 980,007 |
| | $ | 194,277 |
| | $ | 235,107 |
| | $ | 333,097 |
| | $ | 217,526 |
| | $ | 1,153,706 |
| | $ | 179,581 |
| | $ | 440,396 |
| | $ | 143,555 |
| | $ | 390,174 |
|
________________________
| |
(1)1. | Long-term debt obligations primarily represent minimum required principal payments under our credit agreement including estimated interest of $38.0$24.8 million based on a 4.39%4.01% average borrowing interest rate. |
| |
(2)2. | CapitalFinance lease obligations include interest of $3.2$3.0 million. |
| |
(3)3. | Operating lease obligations represent future minimumexclude variable lease commitments payable for land, buildings,costs, such as sales based contingent rent, and equipment used in our operations. This table excludes contingent rents, including amounts which are determined as a percentageinclude interest of adjusted sales in excess of specified levels.$241.2 million. |
| |
(4)4. | Purchase obligations include commitments for the construction of new restaurants and other capital improvement projects and lease commitments for Company-owned restaurants where leases have been executed but construction has not begun. It also includes the Company’sCompany's share of system-wide commitments for food, beverage, and restaurant supply items. These amounts require estimates and could vary due to the timing of volumes. Excluded are any agreements that are cancelable without significant penalty. |
| |
(5)5. | Other non-current liabilities primarily represent the employee deferred compensation plan liability. Refer to Note 16,15, Employee Benefit Programs, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for additional information. |
Financial Condition and Future Liquidity.Liquidity
We require capital principally to grow the business through new restaurant construction, as well as to maintain, improve and refurbish existing restaurants, support for infrastructure needs, and for general operating purposes.purposes, as well as to grow the business through new restaurant construction. In addition, we have and may continue to use capital to pay principal on our borrowings and repurchase our common stock. Our primary short-term and long-term sources of liquidity are expected to be cash flows from operations and our revolving credit facility. Based upon current levels of operations and anticipated growth, we expect cash flows from operations will be sufficient to meet debt service, capital expenditures, and working capital requirements for at least the next twelve months. We and the restaurant industry in general maintain relatively low levels of accounts receivable and inventories, and vendors generally grant short-term trade credit for purchases, such as food and supplies. The addition of new restaurants and refurbishment of existing restaurants are reflected as long-term assets and not as part of working capital.
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-maturingcurrently maturing liabilities to pay for capital expenditures, debt repayment, or to repurchase stock. When necessary, we utilize our revolving credit facilityCredit Facility to satisfy short-term liquidity requirements. However, weWe 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.
Inflation
The primary inflationary factors affectingdeficits and our operations are labor, food costs, energy costs, and materials used in the construction of new restaurants. A large number of our restaurant personnel are paid at rates based on the applicable minimum wage, and increases in the minimum wage have directly affected our labor costs in recent years. Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases. We believe labor cost inflation and food cost inflation, due primarily to ground beef and potatoes, had a negative impact on our financial condition and results of operations during 2018 and 2017. We believe food cost deflation had a positive impact on our financial condition and results of operations during 2016, due primarily to ground beef. Food cost deflation was partially offset by a negative impact of inflation on labor costs in 2016. Uncertainties related to fluctuations in costs, including energy costs, commodity prices, annual indexed wage increases, and construction materials make it difficult to predict what impact, if any,
inflation may have on our business during 2019, but it is anticipated that inflation will continue to have a negative impact on labor costs and commodity costs in fiscal year 2019.
Seasonality
Our business is subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the summer months and winter holiday season. As a result, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly as a result of seasonality. 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, and comparable restaurant sales for any particular future period may fluctuate.planned capital expenditures.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those we believe are both significant and that require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors we believe to be appropriate under the circumstances. Actual results may differ from these estimates, including our estimates of future restaurant level cash flows,
which are subject to the current economic environment, and we might obtain different results if we useduse different assumptions or conditions. We have identified the following as the Company’sCompany's most critical accounting policies, which are most important to the portrayal of the Company’sCompany's financial condition and results and require management’smanagement's most subjective and complex judgment. Information regarding the Company’sCompany's other significant accounting policies is disclosed in Note 1, Description of Business and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
Impairment of Long-Lived Assets. Long-lived assets, including restaurant sites, leasehold improvements, and other fixed assets, right of use assets, and amortizable intangible assets are reviewed when indicators of impairment are present. Expected cash flows associated with an asset are the key factor in determining the recoverability of the asset. Identifiable cash flows are measured at the restaurant level. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, including assumptions on future revenue trends. Management’s estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, changes in economic conditions, changes to our business model, or changes in operating performance. If the sum of the undiscounted cash flows is less than the carrying value of the asset, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset.
Judgments made by management related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause us to realize a material impairment charge. Each restaurant’s past and present operating performance were reviewed in combination with projected future results, primarily through projected undiscounted cash flows, which indicated possible impairment. We compared the carrying amount of each restaurant to its fair value as estimated by management. The fair value of the long-lived assets is typically determined using a discounted cash flow projection model. The discount factor is determined using external information regarding the risk-free rate of return, industry beta factors, and premium adjustments. These factors are combined with internal information such as the Company’s average cost of debt and effective tax rate to determine a weighted average cost of capital which is applied to the undiscounted cash flows. In certain cases, management uses other market information such as market rent, when available, to estimate the fair value of a restaurant. The impairment charges represent the excess of each restaurant’s carrying amount over its estimated fair value. During 2018,2019, we determined 4129 Company-owned restaurants were impaired 19 of which had immaterial impairments,during our cash flow analysis which resulted in a non-cash impairment charge of $28.1$15.1 million. During 2017 and 2016,2018, we impaired 13 and41 Company-owned restaurants, 19 Company-owned restaurantsof which had immaterial impairments, for non-cash charges of $6.9 million and $24.4$28.1 million.
Information technology systems, such as internal-use computer software, are reviewed and tested for recoverability if the internal-use computer software is not expected to provide substantive service potential, a significant change occurs in the extent or manner in which the software is used or is expected to be used, a significant change is made or will be made to the software program, or costs of developing or modifying internal-use software significantly exceed the amount originally expected to develop or modify the software. During 2016, the Company determined certain software related to its ERP system was obsolete upon migration to a cloud-based ERP system. The Company also determined certain software in development for supply chain management would not meet the Company’s requirements if it were implemented. As a result, we recorded a $2.5 million impairment charge to write down the capitalized costs associated with this software.
Goodwill. Goodwill, which is not subject to amortization, is evaluated for impairment annually at the end of the Company’s third fiscal quarter, or more frequently if an event occurs or circumstances change, such as material deterioration in
performance or a significant number of storerestaurant closures, that would indicate an impairment may exist. Goodwill is evaluated at the level of the Company’s single operating segment, which also represents the Company’s only reporting unit. When evaluating goodwill for impairment, the Company may first perform a qualitative assessment, or step zero of the impairment test, to determine whether it is more likely than not that athe fair value of the reporting unit is impaired.exceeds its carrying amount. If we do not perform a qualitative assessment, or if we determine it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, we perform a quantitative assessment and calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. Our decision to perform a qualitative impairment assessment in a given year is influenced by a number of factors, including the significance of the excess of the reporting unit’s estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments, and the price of our common stock.
The Company performed a quantitativequalitative assessment and determined that goodwill was not impaired as of October 7, 2018.6, 2019. No indicators of impairment were identified from the date of our impairment test through the end of 2018. Step one2019. By review of the impairment test is based upon a comparison of the carrying value of net assets, including goodwill balances, to the fair value of net assets. Fair value is measured using a combination of themacroeconomic conditions, industry and market capitalization method, the income approach,conditions, cost factors, overall financial performance compared with prior results and the market approach. The market capitalization method uses the Company’s stock price to derive fair value. The income approach consists of utilizing the discounted cash flow methodprojections, and other relevant entity-specific events, we determined that incorporates the Company’s estimates of future revenues and costs, discounted using a risk-adjusted discount rate. The Company’s estimates used in the income approach are consistent with the plans and estimates used to manage operations. The market approach utilizes multiples of profit measures in order to estimateit was not more likely than not that the fair value of the assets. The Company evaluates all methods to ensure reasonably consistent results. Additionally, the Company evaluates the key input factorsreporting unit was less than its carrying amount.
Our last quantitative assessment of goodwill was performed in 2018, and it was determined that goodwill was not impaired.
Income Taxes. We make certain estimates and judgments in the models usedcalculation of tax expense and the resulting tax liabilities and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. When considered necessary, we record a valuation allowance to determine whetherreduce deferred tax assets to a moderate change in any input factor or combinationbalance that is more likely than not to be recognized. We use an estimate of factors would significantly changeour annual effective tax rate at each interim period based on the resultsfacts and circumstances available at that time while the actual effective tax rate is calculated at year-end. We have recorded deferred tax assets reflecting the benefit of income tax credits. Realization is dependent on generating sufficient taxable income prior to expiration. Although realization is not assured, management believes it is more likely than not that the recognized deferred tax assets will be realized. The amount of the tests.deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
Off Balance Sheet Arrangements
Except for operating leases (primarily restaurant leases) entered into the normal courseletters of business,credit provided under the Credit Facility, we do not have any material off balance sheet arrangements.
RecentRecently Issued Accounting PronouncementsStandards
Refer toSee Note 3, Recent Accounting Pronouncements, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.report for our discussion of recently issued accounting standards.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Under our New Credit Facility, we are exposed to market risk from changes in interest rates on borrowings. Borrowings under the New Credit Facility, if denominated in U.S. Dollars, are subject to rates based on the London Interbank Offered Rate (“LIBOR”("LIBOR") plus a spread based on leverage or a base rate plus a spread based on leverage. The base rate is the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50%, and (c) LIBOR for an Interest Period of one month plus 1%. Borrowings under the New Credit Facility, if denominated in Canadian Dollars, are subject to rates based on LIBOR plus a spread based on leverage or a base rate plus a spread based on leverage. The base rate for these purposes is the highest of (a) the Canadian Prime Rate and (b) the Canadian Dealer Offered Rate (“("CDOR Rate”Rate") for an interest period of one month plus 1%. As of December 30, 2018,29, 2019, we had $192.5$206 million of borrowings subject to variable interest rates. A 1.0% change in the effective interest rate applied to these loans would have resulted in pre-tax interest expense fluctuation of $1.9$2.1 million on an annualized basis.
LIBOR is set to terminate in December 2021, however, we anticipate an amended credit agreement will be executed at the new applicable interest rate. The U.S. Federal Reserve is considering replacing the U.S. dollar LIBOR with the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements and backed by U.S. Treasury securities. However, there is no definitive information regarding the future use of LIBOR, any particular replace rate, or the market acceptance of any potential change. Any such change may have an adverse effect on the cost of our borrowings.
We continue to monitor our interest rate risk on an ongoing basis and may use interest rate swaps or similar instruments in the future to manage our exposure to interest rate changes related to our borrowings as the Company deems appropriate.
Foreign Currency Exchange Risk
We operateDuring 2019, we operated as many as 18 restaurants in Canada, and the Canadian Dollar is the functional currency for our Canadian restaurant operations. We have currency risk related to transactions denominated in Canadian Dollars and the translation of our Canadian restaurants’ financial results into U.S. Dollars.
Due to the immateriality of our Canadian restaurant operations during the year and the refranchising or closure of all Canadian restaurants during the fourth quarter of 2019, our foreign currency risk is limited at this date. As a result, the Company has not entered into any foreign currency exchange rate contracts to hedge against changes in foreign currency exchange rates on assets and liabilities expected to be settled at a future date. Refer to the “Risk Factors” set forth in
Part I, Item 1A of this filing for more information about the market risks to which we are exposed as a result of our foreign operations.
Commodity Price Risks
The Company’s restaurant menus are highly dependent upon a few select commodities, including potatoes, ground beef, steak fries, poultry, and poultry.produce. We may or may not have the ability to increase menu prices, or vary menu items, in response to food commodity price increases. A 1.0% increase in food costs would negatively impact cost of sales by approximately $3.1$3 million on an annualized basis.
Many of the food products we purchase are affected by changes in weather, production, availability, seasonality, and other factors outside our control. In an effort to mitigate some of this risk, we have entered into fixed price agreements on some of our food and beverage products, including certain proteins, produce, and cooking oil. As of December 30, 2018, 62.3%29, 2019, approximately 60% of our estimated annual food and beverage purchases were covered by fixed price contracts, most of which are scheduled to expire at various times through the end of 2019.2021. These contracts may exclude related expenses such as fuel surcharges and other fees. In addition, we believe that almost all of our food and supplies are available from several sources, which helps to reduce or mitigate these risks.
ITEM 8. Financial Statements and Supplementary Data
RED ROBIN GOURMET BURGERS, INC.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Red Robin Gourmet Burgers, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Red Robin Gourmet Burgers, Inc. and subsidiaries (the Company) as of December 30, 201829, 2019 and December 31, 2017,30, 2018, the related consolidated statements of operations and comprehensive (loss) income, (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 30, 2018,29, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 201829, 2019 and December 31, 2017,30, 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 30, 2018,29, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 30, 2018,29, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 201925, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 210 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018.leases as of December 31, 2018 due to the adoption of Accounting Standards Update No. 2016-02, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
Denver, Colorado
February 26, 201925, 2020
RED ROBIN GOURMET BURGERS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
| | | | | December 30, 2018 | | December 31, 2017 | | December 29, 2019 | | December 30, 2018 |
| Assets: | | | | | | | | |
| Current Assets: | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | | $ | 18,569 |
| | $ | 17,714 |
| | $ | 30,045 |
| | $ | 18,569 |
|
| Accounts receivable, net | | 25,034 |
| | 26,499 |
| | 22,372 |
| | 25,034 |
|
| Inventories | | 27,370 |
| | 29,553 |
| | 26,424 |
| | 27,370 |
|
| Prepaid expenses and other current assets | | 27,576 |
| | 31,038 |
| | 26,646 |
| | 27,576 |
|
| Total current assets | | 98,549 |
| | 104,804 |
| | 105,487 |
| | 98,549 |
|
| Property and equipment, net | | 565,142 |
| | 638,151 |
| | 518,013 |
| | 565,142 |
|
| Right of use assets, net | | | 426,248 |
| | — |
|
| Goodwill | | 95,838 |
| | 96,979 |
| | 96,397 |
| | 95,838 |
|
| Intangible assets, net | | 34,609 |
| | 38,273 |
| | 29,975 |
| | 34,609 |
|
| Other assets, net | | 49,803 |
| | 32,408 |
| | 61,460 |
| | 49,803 |
|
| Total assets | | $ | 843,941 |
| | $ | 910,615 |
| | $ | 1,237,580 |
| | $ | 843,941 |
|
Liabilities and Stockholders’ Equity: | | | | | |
| Current Liabilities: | | | | | |
Liabilities and stockholders’ equity: | | | | | |
| Current liabilities: | | | | | |
| Accounts payable | | $ | 39,024 |
| | $ | 35,347 |
| | $ | 33,040 |
| | $ | 39,024 |
|
| Accrued payroll and payroll-related liabilities | | 37,922 |
| | 32,777 |
| | 35,221 |
| | 37,922 |
|
| Unearned revenue | | 55,360 |
| | 55,915 |
| | 54,223 |
| | 55,360 |
|
| Short-term portion of lease obligations | | | 42,699 |
| | 786 |
|
| Accrued liabilities and other current liabilities | | 38,843 |
| | 36,300 |
| | 29,403 |
| | 38,057 |
|
| Total current liabilities | | 171,149 |
| | 160,339 |
| | 194,586 |
| | 171,149 |
|
| Deferred rent | | 77,115 |
| | 74,980 |
| | — |
| | 75,675 |
|
| Long-term debt | | 193,375 |
| | 266,375 |
| | 206,875 |
| | 193,375 |
|
| Long-term portion of capital lease obligations | | 9,414 |
| | 10,197 |
| |
| Long-term portion of lease obligations | | | 465,435 |
| | 9,414 |
|
| Other non-current liabilities | | 10,083 |
| | 11,289 |
| | 10,164 |
| | 11,523 |
|
| Total liabilities | | 461,136 |
| | 523,180 |
| | 877,060 |
| | 461,136 |
|
Stockholders’ Equity: | | | | | |
| Common stock: $0.001 par value; 45,000 shares authorized; 17,851 and 17,851 shares issued; 12,971 and 12,954 shares outstanding | | 18 |
| | 18 |
| |
| Preferred stock: $0.001 par value; 3,000 shares authorized; no shares issued and outstanding | | — |
| | — |
| |
| Treasury stock: 4,880 and 4,897 shares, at cost | | (201,505 | ) | | (202,485 | ) | |
Stockholders’ equity: | | | | | |
| Common stock; $0.001 par value: 45,000 shares authorized; 17,851 shares issued; 12,923 and 12,971 shares outstanding | | | 18 |
| | 18 |
|
| Preferred stock, $0.001 par value: 3,000 shares authorized; no shares issued and outstanding | | | — |
| | — |
|
| Treasury stock 4,928 and 4,880 shares, at cost | | | (202,313 | ) | | (201,505 | ) |
| Paid-in capital | | 212,752 |
| | 210,708 |
| | 213,922 |
| | 212,752 |
|
| Accumulated other comprehensive loss, net of tax | | (4,801 | ) | | (3,566 | ) | | (4,373 | ) | | (4,801 | ) |
| Retained earnings | | 376,341 |
| | 382,760 |
| | 353,266 |
| | 376,341 |
|
Total stockholders’ equity | | 382,805 |
| | 387,435 |
| |
| Total stockholders’ equity | | | 360,520 |
| | 382,805 |
|
Total liabilities and stockholders’ equity | | $ | 843,941 |
| | $ | 910,615 |
| | $ | 1,237,580 |
| | $ | 843,941 |
|
See Notes to Consolidated Financial Statements.
RED ROBIN GOURMET BURGERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (LOSS)
(In thousands, except per share data)amounts)
| | | | | Year Ended | | Year Ended |
| | | December 30, 2018 | | December 31, 2017 | | December 25, 2016 | | December 29, 2019 | | December 30, 2018 | | December 31, 2017 |
| Revenues: | | | | | | | | | | | | |
| Restaurant revenue | | $ | 1,316,209 |
| | $ | 1,365,060 |
| | $ | 1,280,669 |
| | $ | 1,289,521 |
| | $ | 1,316,209 |
| | $ | 1,365,060 |
|
| Franchise revenue | | 17,409 |
| | 17,681 |
| | 17,955 |
| | 17,497 |
| | 17,409 |
| | 17,681 |
|
| Other revenue | | 4,945 |
| | 4,825 |
| | 4,563 |
| | 7,996 |
| | 4,945 |
| | 4,825 |
|
| Total revenues | | 1,338,563 |
| | 1,387,566 |
| | 1,303,187 |
| | 1,315,014 |
| | 1,338,563 |
| | 1,387,566 |
|
| Costs and expenses: | | | | | | | | | | | | |
| Restaurant operating costs (excluding depreciation and amortization shown separately below): | | | | | | | | | | | | |
| Cost of sales | | 313,504 |
| | 320,355 |
| | 298,249 |
| | 303,404 |
| | 313,504 |
| | 320,355 |
|
| Labor (includes $245, $346, and $181 of stock-based compensation) | | 456,262 |
| | 475,432 |
| | 439,232 |
| |
| Labor (includes $161, $245, and $346 of stock-based compensation) | | | 456,778 |
| | 456,262 |
| | 475,432 |
|
| Other operating | | 182,084 |
| | 178,309 |
| | 167,727 |
| | 186,476 |
| | 182,084 |
| | 178,309 |
|
| Occupancy | | 114,146 |
| | 112,753 |
| | 107,408 |
| | 111,798 |
| | 114,146 |
| | 112,753 |
|
| Depreciation and amortization | | 95,371 |
| | 92,545 |
| | 86,695 |
| | 91,790 |
| | 95,371 |
| | 92,545 |
|
| Selling, general, and administrative expenses (includes $3,803, $4,442, and $4,364 of stock-based compensation) | | 146,458 |
| | 156,656 |
| | 144,633 |
| |
| Pre-opening and acquisition costs | | 2,092 |
| | 5,570 |
| | 8,025 |
| |
| Selling, general, and administrative expenses (includes $3,103, $3,803, and $4,442 of stock-based compensation) | | | 155,978 |
| | 146,458 |
| | 156,656 |
|
| Pre-opening costs | | | 319 |
| | 2,092 |
| | 5,570 |
|
| Other charges | | 39,131 |
| | 6,914 |
| | 39,648 |
| | 21,598 |
| | 39,131 |
| | 6,914 |
|
| Total costs and expenses | | 1,349,048 |
| | 1,348,534 |
| | 1,291,617 |
| | 1,328,141 |
| | 1,349,048 |
| | 1,348,534 |
|
| | | | | | | | |
| (Loss) income from operations | | (10,485 | ) | | 39,032 |
| | 11,570 |
| | (13,127 | ) | | (10,485 | ) | | 39,032 |
|
| Other (income) expense: | | | | | | | |
| Interest expense | | 10,704 |
| | 10,955 |
| | 7,239 |
| |
| Other expense (income): | | | | | | | |
| Interest expense and other | | | 10,178 |
| | 10,704 |
| | 10,955 |
|
| Interest (income) and other, net | | 221 |
| | (943 | ) | | (457 | ) | | (1,068 | ) | | 221 |
| | (943 | ) |
| Total other expenses | | 10,925 |
| | 10,012 |
| | 6,782 |
| | 9,110 |
| | 10,925 |
| | 10,012 |
|
| (Loss) income before income taxes | | (21,410 | ) | | 29,020 |
| | 4,788 |
| | (22,237 | ) | | (21,410 | ) | | 29,020 |
|
| Income tax benefit | | (14,991 | ) | | (999 | ) | | (6,937 | ) | | (14,334 | ) | | (14,991 | ) | | (999 | ) |
| Net (loss) income | | $ | (6,419 | ) | | $ | 30,019 |
| | $ | 11,725 |
| | $ | (7,903 | ) | | $ | (6,419 | ) | | $ | 30,019 |
|
| (Loss) earnings per share: | | | | | | | | | | | | |
| Basic | | $ | (0.49 | ) | | $ | 2.33 |
| | $ | 0.88 |
| | $ | (0.61 | ) | | $ | (0.49 | ) | | $ | 2.33 |
|
| Diluted | | $ | (0.49 | ) | | $ | 2.31 |
| | $ | 0.87 |
| | $ | (0.61 | ) | | $ | (0.49 | ) | | $ | 2.31 |
|
| Weighted average shares outstanding: | | | | | | | | | | | | |
| Basic | | 12,976 |
| | 12,899 |
| | 13,332 |
| | 12,959 |
| | 12,976 |
| | 12,899 |
|
| Diluted | | 12,976 |
| | 12,998 |
| | 13,462 |
| | 12,959 |
| | 12,976 |
| | 12,998 |
|
| | | | | | | | | | | | | |
| | | | | | | | |
| Other comprehensive (loss) income: | | | | | | | |
| Other comprehensive income (loss): | | | | | | | |
| Foreign currency translation adjustment | | $ | (1,235 | ) | | $ | 1,442 |
| | $ | 371 |
| | $ | 428 |
| | $ | (1,235 | ) | | $ | 1,442 |
|
| Other comprehensive (loss) income, net of tax | | (1,235 | ) | | 1,442 |
| | 371 |
| |
| Other comprehensive income (loss), net of tax | | | 428 |
| | (1,235 | ) | | 1,442 |
|
| Total comprehensive (loss) income | | (7,654 | ) | | 31,461 |
| | 12,096 |
| | $ | (7,475 | ) | | $ | (7,654 | ) | | $ | 31,461 |
|
| | | | | | | | |
See Notes to Consolidated Financial Statements.
RED ROBIN GOURMET BURGERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| | | | | Common Stock | | Treasury Stock | | | | Accumulated Other Comprehensive Loss, net of tax | | | | | | Common Stock | | Treasury Stock | | | | Accumulated
Other
Comprehensive
Loss,
net of tax | | | | |
| | | Paid-in Capital | | | Retained Earnings | | | | Paid-in
Capital | | | Retained
Earnings | | |
| | | Shares | | Amount | | Shares | | Amount | | Total | Accumulated Other Comprehensive Loss, net of tax | | Shares | | Amount | | Shares | | Amount | | Total | Accumulated
Other
Comprehensive
Loss,
net of tax |
| Balance, December 27, 2015 | | 17,851 |
| | $ | 18 |
| | 4,223 |
| | $ | (167,339 | ) | | $ | 205,995 |
| | $ | (5,379 | ) | | $ | 341,016 |
| | |
| Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan | | — |
| | — |
| | (140 | ) | | 5,697 |
| | (3,001 | ) | | — |
| | — |
| | |
| Excess tax benefit from exercise of stock options | | — |
| | — |
| | — |
| | — |
| | 411 |
| | — |
| | — |
| | 411 |
| |
| Acquisition of treasury stock | | — |
| | — |
| | 940 |
| | (46,078 | ) | | — |
| | — |
| | — |
| | (46,078 | ) | |
| Non-cash stock compensation | | — |
| | — |
| | — |
| | — |
| | 4,617 |
| | — |
| | — |
| | 4,617 |
| |
| Net Income | | | | | | | | | | | | | | 11,725 |
| | 11,725 |
| |
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 371 |
| | — |
| | 371 |
| |
| Balance, December 25, 2016 | | 17,851 |
| | 18 |
| | 5,023 |
| | (207,720 | ) | | 208,022 |
| | (5,008 | ) | | 352,741 |
| | 348,053 |
| | 17,851 |
| | $ | 18 |
| | 5,023 |
| | $ | (207,720 | ) | | $ | 208,022 |
| | $ | (5,008 | ) | | $ | 352,741 |
| | $ | 348,053 |
|
| Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan | | — |
| | — |
| | (126 | ) | | 5,235 |
| | (2,192 | ) | | — |
| | — |
| | 3,043 |
| | — |
| | — |
| | (126 | ) | | 5,235 |
| | (2,192 | ) | | — |
| | — |
| | 3,043 |
|
| Non-cash stock compensation | | — |
| | — |
| | — |
| | — |
| | 4,878 |
| | — |
| | — |
| | 4,878 |
| | — |
| | — |
| | — |
| | — |
| | 4,878 |
| | — |
| | — |
| | 4,878 |
|
| Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 30,019 |
| | 30,019 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 30,019 |
| | 30,019 |
|
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | — |
| | 1,442 |
| | — |
| | 1,442 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,442 |
| | — |
| | 1,442 |
|
| Balance, December 31, 2017 | | 17,851 |
| | 18 |
| | 4,897 |
| | (202,485 | ) | | 210,708 |
| | (3,566 | ) | | 382,760 |
| | 387,435 |
| | 17,851 |
| | 18 |
| | 4,897 |
| | (202,485 | ) | | 210,708 |
| | (3,566 | ) | | 382,760 |
| | 387,435 |
|
| Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan | | — |
| | — |
| | (60 | ) | | 2,454 |
| | (2,007 | ) | | — |
| | — |
| | 447 |
| | — |
| | — |
| | (60 | ) | | 2,454 |
| | (2,007 | ) | | — |
| | — |
| | 447 |
|
| Acquisition of treasury stock | | — |
| | — |
| | 43 |
| | (1,474 | ) | | — |
| | — |
| | — |
| | (1,474 | ) | | — |
| | — |
| | 43 |
| | (1,474 | ) | | — |
| | — |
| | — |
| | (1,474 | ) |
| Non-cash stock compensation | | — |
| | — |
| | — |
| | — |
| | 4,051 |
| | — |
| | — |
| | 4,051 |
| | — |
| | — |
| | — |
| | — |
| | 4,051 |
| | — |
| | — |
| | 4,051 |
|
| Net loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6,419 | ) | | (6,419 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6,419 | ) | | (6,419 | ) |
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,235 | ) | | — |
| | (1,235 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,235 | ) | | — |
| | (1,235 | ) |
| Balance, December 30, 2018 | | 17,851 |
| | $ | 18 |
| | 4,880 |
| | $ | (201,505 | ) | | $ | 212,752 |
| | $ | (4,801 | ) | | $ | 376,341 |
| | $ | 382,805 |
| | 17,851 |
| | 18 |
| | 4,880 |
| | (201,505 | ) | | 212,752 |
| | (4,801 | ) | | 376,341 |
| | 382,805 |
|
| Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan | | | — |
| | — |
| | (64 | ) | | 2,642 |
| | (2,180 | ) | | — |
| | — |
| | 462 |
|
| Acquisition of treasury stock | | | — |
| | — |
| | 112 |
| | (3,450 | ) | | — |
| | — |
| | — |
| | (3,450 | ) |
| Non-cash stock compensation | | | — |
| | — |
| | — |
| | — |
| | 3,350 |
| |
|
| |
|
| | 3,350 |
|
| Topic 842 transition impairment, net of tax | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (15,172 | ) | | (15,172 | ) |
| Net loss | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,903 | ) | | (7,903 | ) |
| Other comprehensive income | | | — |
| | — |
| | — |
| | — |
| | — |
| | 428 |
| | | | 428 |
|
| Balance, December 29, 2019 | | | 17,851 |
| | $ | 18 |
| | 4,928 |
| | $ | (202,313 | ) | | $ | 213,922 |
| | $ | (4,373 | ) | | $ | 353,266 |
| | $ | 360,520 |
|
See Notes to Consolidated Financial Statements.
RED ROBIN GOURMET BURGERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | Year Ended | | Year Ended |
| | | December 30, 2018 | | December 31, 2017 | | December 25, 2016 | | December 29, 2019 | | December 30, 2018 | | December 31, 2017 |
| Cash Flows From Operating Activities: | | | | | | | | | | | | |
| Net (loss) income | | $ | (6,419 | ) | | $ | 30,019 |
| | $ | 11,725 |
| |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | |
| Net income | | | $ | (7,903 | ) | | $ | (6,419 | ) | | $ | 30,019 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| Depreciation and amortization | | 95,371 |
| | 92,545 |
| | 86,695 |
| | 91,790 |
| | 95,371 |
| | 92,545 |
|
| Gift card breakage | | | (6,776 | ) | | (3,898 | ) | | (4,026 | ) |
| Other charges - asset impairment and unpaid other charges | | 35,715 |
| | 6,914 |
| | 31,842 |
| | 1,473 |
| | 35,715 |
| | 6,914 |
|
| Deferred income tax benefit | | (18,613 | ) | | (6,478 | ) | | (11,929 | ) | | (9,640 | ) | | (18,613 | ) | | (6,478 | ) |
| Stock-based compensation expense | | 4,048 |
| | 4,788 |
| | 4,545 |
| | 3,344 |
| | 4,048 |
| | 4,788 |
|
| Other, net | | (2,846 | ) | | (2,983 | ) | | (2,962 | ) | | 678 |
| | 1,052 |
| | 1,043 |
|
| Changes in operating assets and liabilities, net of effects of acquired business: | | | | | | | |
| Changes in operating assets and liabilities: | | | | | | | |
| Accounts receivable | | 2,922 |
| | (609 | ) | | 6,802 |
| | 2,766 |
| | 2,922 |
| | (609 | ) |
| Prepaid expenses and other current assets | | 5,918 |
| | (4,105 | ) | | (11,557 | ) | | (8,240 | ) | | 5,918 |
| | (4,105 | ) |
| Trade accounts payable and accrued liabilities | | 5,685 |
| | 21,022 |
| | (22,385 | ) | | (15,490 | ) | | 5,685 |
| | 21,022 |
|
| Unearned revenue | | 3,397 |
| | 9,701 |
| | 5,073 |
| | 5,632 |
| | 3,397 |
| | 9,701 |
|
| Other operating assets and liabilities, net | | 1,117 |
| | 5,793 |
| | 1,108 |
| | 281 |
| | 1,117 |
| | 5,793 |
|
| Net cash provided by operating activities | | 126,295 |
| | 156,607 |
| | 98,957 |
| | 57,915 |
| | 126,295 |
| | 156,607 |
|
| Cash Flows From Investing Activities: | | | | | | | | | | | | |
| Purchases of property, equipment and intangible assets | | (50,271 | ) | | (83,531 | ) | | (163,767 | ) | | (57,309 | ) | | (50,271 | ) | | (83,531 | ) |
| Acquisition of franchise restaurants, net of cash acquired | | — |
| | — |
| | (39,966 | ) | |
| Proceeds from sales of real estate and property, plant, and equipment and other | | 435 |
| | 241 |
| | 4,354 |
| | 279 |
| | 435 |
| | 241 |
|
| Net cash used in investing activities | | (49,836 | ) | | (83,290 | ) | | (199,379 | ) | | (57,030 | ) | | (49,836 | ) | | (83,290 | ) |
| Cash Flows From Financing Activities: | |
|
| |
|
| |
|
| | | | | | |
| Borrowings of long-term debt | | 215,500 |
| | 186,550 |
| | 366,500 |
| | 273,500 |
| | 215,500 |
| | 186,550 |
|
| Payments of long-term debt and capital leases | | (289,238 | ) | | (257,215 | ) | | (233,642 | ) | |
| Payments of long-term debt and finance leases | | | (261,063 | ) | | (289,238 | ) | | (257,215 | ) |
| Purchase of treasury stock | | (1,474 | ) | | — |
| | (46,078 | ) | | (3,450 | ) | | (1,474 | ) | | — |
|
| Debt issuance costs | | — |
| | (664 | ) | | (1,058 | ) | | (33 | ) | | — |
| | (664 | ) |
| Tax benefit from exercise of stock options | | — |
| | — |
| | 411 |
| |
| Proceeds from exercise of stock options and employee stock purchase plan | | 914 |
| | 3,405 |
| | 3,200 |
| | 724 |
| | 914 |
| | 3,405 |
|
| Net cash (used in) provided by financing activities | | (74,298 | ) | | (67,924 | ) | | 89,333 |
| |
| Effect of exchange rate changes on cash and cash equivalents | | (1,306 | ) | | 589 |
| | 116 |
| |
| Net increase (decrease) in cash and cash equivalents | | $ | 855 |
| | $ | 5,982 |
| | $ | (10,973 | ) | |
| Cash and cash equivalents, beginning of year | | 17,714 |
| | 11,732 |
| | 22,705 |
| |
| Cash and cash equivalents, end of year | | $ | 18,569 |
| | $ | 17,714 |
| | $ | 11,732 |
| |
| Net cash provided by (used in) financing activities | | | 9,678 |
| | (74,298 | ) | | (67,924 | ) |
| Effect of Currency Translation on Cash | | | 913 |
| | (1,306 | ) | | 589 |
|
| Net increase in cash and cash equivalents | | | 11,476 |
| | 855 |
| | 5,982 |
|
| Cash and cash equivalents, beginning of period | | | 18,569 |
| | 17,714 |
| | 11,732 |
|
| Cash and cash equivalents, end of period | | | $ | 30,045 |
| | $ | 18,569 |
| | $ | 17,714 |
|
| | | | | | | | |
| Supplemental disclosure of cash flow information | | | | | | | |
| Income taxes paid | | | $ | 3,237 |
| | $ | 2,486 |
| | $ | 3,999 |
|
| Interest paid, net of amounts capitalized | | | $ | 9,750 |
| | $ | 10,013 |
| | $ | 10,372 |
|
| Change in accrued capital expenditures | | | $ | (3,910 | ) | | $ | (507 | ) | | $ | (5,951 | ) |
See Notes to Consolidated Financial Statements.
RED ROBIN GOURMET BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries (“Red Robin,” “we,” “us,” “our”, or the “Company”), primarily develops, operates, franchises, and franchisesdevelops casual-dining restaurants in North America. As of December 30, 2018,29, 2019, the Company owned and operated 484454 restaurants located in 39 states and two Canadian provinces.38 states. The Company also had 89 102 casual-dining restaurants operated by franchisees in 16 states.states and one Canadian province. The Company operates its business as one operating and one reportable segment.
Basis of Presentation and Principles of Consolidation and Fiscal Year- —The consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States and include the accounts of Red Robin and its wholly owned subsidiaries after elimination of all intercompany accounts and transactions. The Company’s fiscal year is 52 or 53 weeks ending the last Sunday of the calendar year. FiscalYear end dates and the number of weeks in each fiscal year 2018 included 52 weeks, ending on December 30, 2018. Fiscal year 2017 included 53 weeks, ending on December 31, 2017. Fiscal years 2016, 2015,are shown in the table below for periods presented in this Form 10-K and 2014 each included 52 weeks, ending on December 25, 2016, December 27, 2015, and December 28, 2014. Fiscal year 2019 will include 52 weeks and will end on December 29, 2019. We refer to ourfor the upcoming fiscal years as 2019, 2018, 2017, 2016, 2015, and 2014 throughout this Annual Report on Form 10-K.year.
|
| | | | | |
| Fiscal Year | | Year End Date | | Number of Weeks in Fiscal Year |
| Current and Prior Fiscal Years: | | | | |
| 2019 | | December 29, 2019 | | 52 |
|
| 2018 | | December 30, 2018 | | 52 |
|
| 2017 | | December 31, 2017 | | 53 |
|
| Upcoming Fiscal Year | | | | |
| 2020 | | December 27, 2020 | | 52 |
|
Use of Estimates—- The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The areas that require management’s most significant estimates are impairment of long livedlong-lived assets, goodwill, lease accounting, insurance/self-insurance reserves, estimating fair value, income taxes, unearned revenue, and stock-based compensation expense. Actual results could differ from those estimates.
Reclassifications—- Certain amounts presented in prior periods have been reclassified to conform with the current period presentation. For the fiscal year ended December 30, 2018, the Company reclassified unfavorable lease rights of $1.4 million from Deferred rent to Other non-current liabilities and reclassified the short-term portion of our lease obligations totaling $0.8 million from Accrued liabilities and other to its own line item on the consolidated balance sheets. Management believes this presentation better reflects the nature of these liabilities subsequent to the adoption of Topic 842 (Leases), as defined in Note 10, Leases. For the fiscal years ended December 31, 201730, 2018 and December 25, 2016,31, 2017, the Company reclassified franchise advertising fund contributionsgift card breakage of $3.9 million and $4.0 million, respectively, from Selling, general, and administrative expensesOther, net to Franchise revenue. Referits own line item presented in the adjustments to Note 2, Revenue for a further discussionreconcile net (loss) income to net cash provided by operating activities on the consolidated statements of reclassifications recorded in connection with Topic 606.cash flows.
Cash Equivalents—- The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Amounts receivable from credit card issuers are typically converted to cash within two to four days of the original sales transaction and are considered to be cash equivalents.
Cash and cash equivalents are maintained with multiple financial institutions. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore bear minimal credit risk. The Company holds cash and cash equivalents at financial institutions in excess of amounts covered by the Federal Depository Insurance Corporation (the “FDIC”) and sometimes invests excess cash in money market funds not insured by the FDIC.
Accounts Receivable—- Accounts receivable consists primarily of third-party gift card receivables, tenant improvement allowances, and trade receivables due from franchisees for royalties. At the end of 2018,2019, there was approximately $13.8$13.3 million of gift cards in transit in accounts receivable related to gift cards that were sold by third-party retailers compared to $14.3$13.8 million at the end of 2017.2018. At the end of 2018,2019, there was also approximately $2.4$0.6 million related to tenant improvement allowances in accounts receivable compared to $2.2$2.4 million at the end of 2017.2018.
Inventories—- Inventories consist of food, beverages, and supplies valued at the lower of cost (first-in, first-out method) or net realizable value. At the end of 20182019 and 2017,2018, food and beverage inventories were $8.1 million and $8.7 million, and $9.0 millionrespectively, and supplies inventories were $18.3 million and $18.6 million, and $20.6 million.respectively.
Property and Equipment—- Property and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance, and repairs are expensed as incurred. Depreciation is computed on the straight-line method, based on the shorter of the estimated useful lives or the terms of the underlying leases of the related assets. Interest incurred on funds used to construct Company-owned restaurants is capitalized and amortized over the estimated useful life of the related assets. Capitalized interest totaled $0.2 million, $0.3 million, and $0.2 million in 2018, 2017, and 2016.
The estimated useful lives for property and equipment are:
|
| | |
| Buildings | | 5 to 20 years |
| Leasehold improvements | | Shorter of lease term or estimated useful life, not to exceed 20 years |
| Furniture, fixtures and equipment | | 5 to 20 years |
| Computer equipment | | 2 to 5 years |
The Company capitalizes certain overhead related to the development and construction of its new restaurants as well as certain information technology infrastructure upgrades. Costs incurred for the potential development of restaurants that are subsequently terminated are expensed.
Goodwill and Intangible Assets, net—- Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired. Intangible assets comprise primarily leasehold interests, acquired franchise rights, and the costs of purchased liquor licenses. Leasehold interests primarily represent the fair values of acquired lease contracts having contractual rents lower than fair market rents and are amortized on a straight-line basis over the remaining initial lease term. Acquired franchise rights, which represent the acquired value of franchise contracts, are amortized over the term of the franchise agreements. The costs of obtaining non-transferable liquor licenses from local government agencies are capitalized and generally amortized over a period of up to 20 years. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets.
Goodwill, which is not subject to amortization, is evaluated for impairment annually as of the end of the Company’s third fiscal quarter, or more frequently if an event occurs or circumstances change, such as material deterioration in performance or a significant number of storerestaurant closures, that would indicate an impairment may exist. Goodwill is evaluated at the level of the Company’s single operating segment, which also represents the Company’s only reporting unit.
When evaluating goodwill for impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, we perform a quantitative assessment and calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. Our decision to perform a qualitative impairment assessment in a given year is influenced by a number of factors, including the significance of the excess of the reporting unit’s estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments, and the price of our common stock.
The Company performed a qualitative assessment for the 2019 annual impairment evaluation at the end of the third fiscal quarter and determined goodwill was not impaired. No indicators of impairment were identified from the date of our impairment test through the end of 2019. By review of macroeconomic conditions, industry and market conditions, cost factors, overall financial performance compared with prior projections and prior actual financial results, other relevant entity-specific events, and changes in share price, we determined it was not more likely than not that the fair value of the reporting unit was less than its carrying amount.
The Company performed a quantitative assessment and determined that goodwill was not impaired as of October 7, 2018. No indicators of impairment were identified from the date of our impairment test through the end of 2018. Step one of the impairment test is based upon a comparison of the carrying value of net assets, including goodwill balances, to the fair value of net assets. Fair value is measured using a combination of the market capitalization method, the income approach, and the market approach. The market capitalization method uses the Company’s stock price to derive fair value. The income approach consists of utilizing the discounted cash flow method that incorporates the Company’s estimates of future revenues and costs, discounted using a risk-adjusted discount rate. The Company’s estimates used in the income approach are consistent with the plans and estimates used to manage operations. The market approach utilizes multiples of profit measures in order to estimate the fair value of the assets. The Company evaluates all methods to ensure reasonably consistent results. Additionally, the Company evaluates the key input factors in the models used to determine whether a moderate change in any input factor or combination of factors would significantly change the results of the tests.
The Company performed a qualitative assessment for the 2017 annual impairment evaluation at the end of the third fiscal quarter and determined goodwill was not impaired. No indicators of impairment were identified from the date of our impairment test through the end of 2017. By review of macroeconomic conditions, industry and market conditions, cost factors, overall financial performance compared with prior projections, and other relevant entity-specific events, we determined it was not more likely than not that the fair value of the reporting unit was less than its carrying amount.
Liquor licenses with indefinite lives are reviewed for impairment annually or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an
impairment charge for the excess of the carrying amount over the fair value. We determine fair value based on prices in the open market for license in same or similar jurisdictions. No impairment charges were recorded in 2019, 2018, 2017, or 2016.
2017.
Impairment of Long-Lived Assets—- The Company reviews its long-lived assets, including restaurant sites, leasehold improvements, information technology systems, and other fixed assets, and amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant level. If the assets are determined to be impaired, the amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value. Fair value is generally determined using forecasted cash flows discounted using an estimated weighted average cost of capital. Management may also utilize other market information to determine fair value when relevant information is available. Restaurant sites and other assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell. Information technology systems, such as internal-use computer software, are reviewed and tested for recoverability if the internal-use computer software is not expected to provide substantive service potential, a significant change occurs in the extent or manner in which the software is used or is expected to be used, a significant change is made or will be made to the software program, or costs of developing or modifying internal-use software significantly exceed the amount originally expected to develop or modify the software.
During 2018, 2017, and 2016, the Company recorded impairments of certain long-lived assets. See Note 4, Other Charges.
Other Assets, net—- Other assets, net consist primarily of assets related to various deposits, the employee deferred compensation plan and unamortized debt issuance costs on revolving credit facilities. Debt issuance costs are capitalized and amortized to interest expense on a straight-line basis which approximates the effective interest rate method over the term of the Company’s long termlong-term debt. Refer to Note 8, Borrowings.
Advertising—- Under the Company’s franchise agreements, both the Company and the franchisees must contribute a up to 3.0% of revenues to two national media advertising funds (the “Advertising Funds”). These Advertising Funds are used to build the Company’s brand equity and awareness primarily through a national marketing strategy, including national television advertising, digital media, social media programs, email, loyalty, and public relations initiatives. Contributions to these Advertising Funds from franchisees are recorded as advertising costsrevenue under Selling, general, and administrative expensesFranchise revenue in the consolidated statements of operations and comprehensive (loss) income (loss)in accordance with Topic 606 (Revenue from Contracts with Customers).
Total advertising costs were $44.3 million, $48.0$44.3 million, and $37.6$48 million in 2019, 2018, and 2017, and 2016,respectively, and were included in Selling, general, and administrative expenses.
Advertising production costs are expensed in the period when the advertising first takes place. Other advertising costs are expensed as incurred.
Rent—The Company’s leases generally contain escalating rent payments over the lease term as well as optional renewal periods. The Company accounts for its leases by recognizing rent expense on a straight-line basis over the lease term, which includes reasonably assured renewal periods. The lease term begins when the Company has the right to control the use of the property, which is typically before rent payments are due under the lease agreement. The difference between the rent expense and rent paid is recorded as Deferred rent in the consolidated balance sheets. Rent expense for the period prior to the restaurant opening is expensed in pre-opening costs. Tenant incentives used to fund leasehold improvements are recorded in deferred rent and amortized as reductions of lease rent expense ratably over the lease term.
Additionally, certain of the Company’s operating lease agreements contain clauses that provide for additional contingent rent based on a percentage of sales greater than certain specified target amounts. The Company recognizes contingent rent expense prior to the achievement of the specified target that triggers contingent rent, provided the achievement of that target is considered probable. Refer to Note 12, Commitments and Contingencies.
Self-Insurance Programs—- The Company utilizes a self-insurance plan for health, general liability, and workers’ compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit the Company’s per occurrence cash outlay. Accrued liabilities and accrued payroll and payroll-related liabilities include the estimated cost to settle reported claims and incurred but unreported claims.
Legal Contingencies—- In the normal course of business, we are subject to various legal proceedings and claims, the outcomes of which are uncertain. We record an accrual for legal contingencies when we determine it is probable that we have incurred a liability and we can reasonably estimate the amount of the loss. In making such determinations we evaluate, among
other things, the probability of an unfavorable outcome and, when we believe it probable that a liability has been incurred, our ability to make a reasonable estimate of the loss. See Note 12, Commitments and Contingencies, for additional details.
Pre-opening Costs—- Pre-opening costs are expensed as incurred. Pre-opening costs include rental expenses through the date of opening for each restaurant, travel expenses, wages and benefits for the training and opening teams, as well as food, beverage, and other restaurant opening costs incurred prior to a restaurant opening for business. Costs related to preparing restaurants to introduce Donatos® will be expensed as incurred and included in pre-opening costs.
Income Taxes—- Deferred tax liabilities are recognized for the estimated effects of all taxable temporary differences, and deferred tax assets are recognized for the estimated effects of all deductible temporary differences and net operating losses, if any, and tax credit carryforwards. Realization of net deferred tax assets is dependent upon profitable operations and future reversals of existing taxable temporary differences. However, the amount of the deferred tax assets considered realizable could be adjusted if estimates of future taxable income during the carry forward period are increased or reduced or if there are differences in the timing or amount of future reversals of existing taxable temporary differences.
We do not provide for deferred taxes on the excess of the financial reporting basis over the tax basis in our investments in foreign subsidiaries that are essentially permanent in duration. We intend to reinvest earnings from our foreign subsidiaries, if any, in those operations for the foreseeable future. We have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs and, accordingly, we do not provide for U.S. federal income and foreign withholding tax on
these earnings. While we do not expect to repatriate cash to the U.S., if these funds were distributed to the U.S., in the form of dividends or otherwise, we would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.
Pursuant to the guidance for uncertain tax positions, a taxpayer must be able to more likely than not sustain a position to recognize a tax benefit, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. The Company has analyzed filing positions in all of the federal, state, and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company’s federal and state returns are the 2014 through 2018 tax years.
The Company records interest and penalties associated with audits as a component of income before taxes. Penalties are recorded in Interest income and other, net, and interest paid or received is recorded in Interest expense and other in the consolidated statements of operations and comprehensive (loss) income. The Company recorded immaterial interest expense on the identified tax liabilities in 2019, 2018, and 2017.
Earnings Per Share—- Basic earnings per share amounts are calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share amounts are calculated based upon the weighted average number of common and potentially dilutive common shares outstanding during the year. Potentially dilutive shares are excluded from the computation in periods in which they have an anti-dilutive effect. Diluted earnings per share reflect the potential dilution that could occur if holders of options exercised their holdings into common stock.
The Company uses the treasury stock method to calculate the impact of outstanding stock options. Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding for the fiscal years ended December 29, 2019, December 30, 2018, and December 31, 2017 and December 25, 2016 as follows (in thousands):
| | | | | 2018 | | 2017 | | 2016 | 2019 | | 2018 | | 2017 |
| Basic weighted average shares outstanding | | 12,976 |
| | 12,899 |
| | 13,332 |
| 12,959 |
| | 12,976 |
| | 12,899 |
|
| Dilutive effect of stock options and awards | | — |
| | 99 |
| | 130 |
| — |
| | — |
| | 99 |
|
| Diluted weighted average shares outstanding | | 12,976 |
| | 12,998 |
| | 13,462 |
| 12,959 |
| | 12,976 |
| | 12,998 |
|
| | | | | | | | | | | | |
| Awards excluded due to anti-dilutive effect on diluted earnings per share | | 427 |
| | 329 |
| | 229 |
| 378 |
| | 427 |
| | 329 |
|
Comprehensive (Loss) Income—- Comprehensive (loss) income or loss consists of the net income or loss and other gains and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net income. Other comprehensive loss(loss) income as presented in the Consolidated Statements of Stockholders’ Equity for 2019, 2018, 2017, and 20162017 consisted of the foreign currency translation adjustment.adjustment resulting from the Company's Canadian restaurant operations.
Stock-Based Compensation—- The Company maintains several equity incentive plans under which it may grant stock options, stock appreciation rights, restricted stock, stock variable compensation or other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock, as well as cash variable compensation awards to employees, non-employees, directors, and consultants. The Company also maintains an employee stock purchase plan. See Note 15, Stock Incentive Plans, for additional details.The Company issues shares relating to stock-based compensation plans and the employee stock purchase plan from treasury shares.
Deferred Compensation (Income) Expense—- The Company has assets and liabilities related to a deferred compensation plan. The assets of the deferred compensation plan are held in a rabbi trust, where they are invested in certain mutual funds that cover an investment spectrum range from equities to money market instruments. Increases in the market value of the investments held in the trust result in the recognition of deferred compensation expense reported in Selling, general, and administrative expenses and recognition of investment gain reported in Interest income and other, net, in the consolidated statements of operations and comprehensive income (loss). Decreases in the market value of the investments held in the trust result in the recognition of a reduction to deferred compensation expense and recognition of investment loss reported in Interest income and other, net, in the consolidated statements of operations and comprehensive income (loss). See Note 16, Employee Benefit Programs, for additional details.
Foreign Currency Translation—- The Canadian Dollar is the functional currency for our Canadian restaurant operations. Assets and liabilities denominated in Canadian Dollars are translated into U.S. Dollars at exchange rates in effect as of the balance sheet date. Income and expense accounts are translated using the average exchange rates prevailing throughout the period. The resulting translation adjustment is recorded as a separate component of Other comprehensive income (loss). income. Gain or loss from foreign currency transactions is recognized in our consolidated statements of operations and comprehensive income (loss). income.
2. Revenue
In May 2014, the FASB issued Revenue from Contracts with Customers (“Topic 606”), subsequently amended by various standard updates. This guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, this guidance expands related disclosure requirements. The Company adopted Topic 606 in first quarter 2018 and applied the guidance retrospectively to all prior periods presented. Topic 606 impacts the accounting treatment of the Company’s advertising contribution funds, and the Company’s financial statements, as outlined below.
Advertising Fund Contributions
Under Red Robin franchise agreements, the Company and its franchisees are required to contribute a certain percentage of revenues to two national media advertising funds. The Company’s national advertising services are provided on a system-wide basis and, therefore, not considered distinct performance obligations for individual franchisees. The Company previously recorded the advertising contributions from franchisees as a reduction to advertising expense under Selling, general, and administrative expenses. In accordance with Topic 606, the Company recognizes these sales-based advertising contributions from franchisees as franchise revenue when the underlying franchisee sales occur. The Company records the related advertising expenses as incurred under Selling, general, and administrative expenses. When an advertising fund is over-spent at year end, advertising expenses will be reported on the consolidated statement of operations in an amount that is greater than the revenue recorded for advertising contributions. Conversely, when an advertising fund is under-spent at year end, the Company will accrue advertising costs up to advertising contributions recorded in revenue. All prior periods presented have been retrospectively adjusted for this change in accounting policy. The adoption of this standard did not impact previously reported amounts of net income.
Impacts on Financial Statements
Franchise and other revenue for the 53 weeks ended December 31, 2017 were previously reported as $11.0 million with adjustments of $6.6 million, resulting in an adjusted amount of $17.7 million. Franchise and other revenue for the 52 weeks ended December 25, 2016 were previously reported as $11.2 million with adjustments of $6.7 million, resulting in an adjusted amount of $18.0 million. Effective in our 2018 consolidated statements of operations and comprehensive income (loss), Franchise royalties and fees will be renamed as Franchise revenue to capture all types of franchise related revenues earned by the Company.
Selling, general, and administrative expenses for the 53 weeks ended December 31, 2017 were previously reported as $150.0 million prior to the reclassification of adjustments of $6.6 million, resulting in an adjusted amount of $156.7 million. Selling, general, and administrative expenses for the 52 weeks ended December 25, 2016 were previously reported as $137.9 million prior to the reclassification of adjustments of $6.7 million, resulting in an adjusted amount of $144.6 million. See “Reclassifications” under Note 1, Basis of Presentation and Recent Accounting Pronouncements.
Revenue recognitionRecognition
Revenues consist of sales from restaurant operations, franchise revenue, and other revenue including gift card breakage and miscellaneous revenue. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a restaurant Guest, franchisee, or other customer.
Restaurant revenue
The Company recognizes revenues from restaurant sales when payment is tendered at the point of sale, as the Company’s performance obligation to provide food and beverage to the customer has been satisfied.
The Company sells gift cards which do not have an expiration date, and it does not deduct dormancy fees from outstanding gift card balances. We recognize revenue from gift cards as either: (i) Restaurant revenue, when the Company’s performance obligation to provide food and beverage to the customer is satisfied upon redemption of the gift card, or (ii) gift card breakage, as discussed in Other revenue below.
Red Robin Royalty™ deferred revenue primarily relates to a program in which registered members earn an award for a free entrée for every nine entrées purchased. We recognize the current sale of an entrée and defer a portion of the revenue to reflect partial pre-payment for the future entrée the member is entitled to receive. We estimate the future value of the award based on the historical average value of redemptions. We also estimate what portion of registered members are not likely to reach the ninth purchase based on historical activity and recognize the deferred revenue related to those purchases. We recognize the deferred revenue in restaurant revenue on earned rewards when the Company satisfies its performance obligation
at redemption, or upon expiration. We compare the estimate of the value of future awards to historical redemptions to evaluate the reasonableness of the deferred amount.
Franchise revenue
Revenues we receive from our franchise arrangements include sales-based royalties, advertising fund contributions, area development fees, and franchise fees. Red Robin franchisees are required to remit 4.0% to 5.0% of their revenues as royalties to the Company and contribute up to 3.0% of revenues to two national advertising funds. The Company recognizes these sales-based royalties and advertising fund contributions as the underlying franchisee sales occur.
The Company also provides its franchisees with management expertise, training, pre-opening assistance, and restaurant operating assistance in exchange for area development fees and franchise fees. The Company capitalizes these fees upon collection from the franchisee, which then amortize over the contracted franchise term as the services comprising the performance obligation are satisfied. The Company typically grants franchise rights to franchisees for a term of 20 years, with the right to extend the term for an additional ten years if various conditions are satisfied by the franchisee.
Other revenue
Gift card breakage is recognized when the likelihood of a gift card being redeemed by the customer is remote and the Company determines there is not a legal obligation to remit the unredeemed gift card balance to the relevant jurisdiction. The determination of the gift card breakage rate is based upon the Company’s specific historical redemption patterns. The Company recognizes gift card breakage by applying its estimate of the rate of gift card breakage on a pro rata basis over the period of estimated redemption.
Other revenue also consists of miscellaneous revenues considered insignificant to the Company’s business.
Disaggregation of revenueRevenue
In the following table, revenue is disaggregated by type of good or service (in thousands):
| | | | | 2018 | | 2017 | | 2016 | | Year Ended |
| | | December 30, 2018 | | December 31, 2017 | | December 25, 2016 | | December 29, 2019 | | December 30, 2018 | | December 31, 2017 |
| Restaurant revenue | | $ | 1,316,209 |
| | $ | 1,365,060 |
| | $ | 1,280,669 |
| | $ | 1,289,521 |
| | $ | 1,316,209 |
| | $ | 1,365,060 |
|
| Franchise revenue | | 17,409 |
| | 17,681 |
| | 17,955 |
| | 17,497 |
| | 17,409 |
| | 17,681 |
|
| Other revenue | | 4,945 |
| | 4,825 |
| | 4,563 |
| | 7,996 |
| | 4,945 |
| | 4,825 |
|
| Total revenues | | $ | 1,338,563 |
| | $ | 1,387,566 |
| | $ | 1,303,187 |
| | $ | 1,315,014 |
| | $ | 1,338,563 |
| | $ | 1,387,566 |
|
Contract liabilitiesLiabilities
Unearned gift card revenue at December 29, 2019 and December 30, 2018 December 31, 2017, and December 25, 2016 was $45.3 million, $45.4$43.5 million and $41.0$45.3 million. Deferred loyalty revenue, which was also included in Unearned revenue in the accompanying condensed consolidated balance sheets, was $10.0$10.7 million and $10.6$10.0 million at December 30, 201829, 2019 and December 31, 2017.30, 2018.
Revenue recognized in the consolidated statements of operations and comprehensive (loss) income (loss) for the redemption of gift cards that were included in the liability balance at the beginning of the fiscal year was as follows (in thousands): |
| | | | | | | | | | | | |
| | | Fifty-two Weeks Ended | | Fifty-three Weeks Ended | | Fifty-two Weeks Ended |
| | | December 30, 2018 | | December 31, 2017 | | December 25, 2016 |
| Gift card revenue | | $ | 17,487 |
| | $ | 16,337 |
| | $ | 15,686 |
|
|
| | | | | | | | | | | | |
| | | Year Ended |
| | | December 29, 2019 | | December 30, 2018 | | December 31, 2017 |
| Gift card revenue | | $ | 19,941 |
| | $ | 17,487 |
| | $ | 16,337 |
|
3. Recent Accounting Pronouncements
LeasesCurrent Expected Credit Losses
In FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”) issued Update 2016-02, Leases2016-13, Financial Instruments - Credit Losses (“Topic 842”326”)., subsequently amended by various standard updates. This guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information when determining credit loss estimates and requires financial assets to be measured net of expected credit losses at the recognitiontime of liabilities for lease obligations and corresponding right-of-use assets on the balance sheet and disclosure of key information about leasing arrangements.initial recognition. This guidance is effective for annual and interim reporting periods beginning after December 15, 20182019 using a modified retrospective adoption method with the option of applying the guidance either retrospectively to each prior comparative reporting period presented or retrospectively at the beginning of the
period of adoption.method. Early adoption is permitted. The Company will adopt this
We evaluated the guidance beginning with its fiscal first quarter 2019by reviewing our trade and will apply it retrospectively atother receivable balances and grouping them into asset pools based on similar risk characteristics. We then reviewed our asset pools for collectibility using a broad range of factors including historical collections data as well as qualitative analysis of both historical and prospective factors to develop an expected loss rate. We then applied the beginningexpected loss rate to the asset pools to determine the expected impact of our adoption of the period of adoption through a cumulative-effect adjustment to retained earnings. We will elect to apply the practical expedients thatstandard. Based on our analysis, we do not require us to reassess existing contracts for embedded leases or to reassess lease classification or initial direct costs. The Company has implemented its new lease management system and will adopt this guidance beginning with its fiscal first quarter 2019. On adoption, we expect to recognize additional operating liabilitiesa material impact upon adoption in the first quarter of 2020.
Income Taxes
In December 2019, the Financial Accounting Standards Board ("FASB") issued Update 2019-12, Income Taxes ("Topic 740") as part of its Simplification Initiative. This guidance provides amendments to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This guidance is effective for annual and interim reporting periods beginning after December 15, 2020, and early adoption is permitted. We are currently evaluating the full impact this guidance will have on our consolidated financial statements.
We reviewed all other recently issued accounting pronouncements and concluded they were either not exceeding $700 million for existing operating leases, basedapplicable or not expected to have a significant impact on the present value of the remaining minimum rental payments. We expect to recognize the corresponding right-of-use assets not exceeding $623.1 million and derecognize $77.1 million of deferred rent and $0.2 million of prepaid rent.Company's consolidated financial statements.
4. Other Charges
Other charges consist of the following (in thousands):
| | | | | 2018 | | 2017 | | 2016 | | Year Ended |
| Asset impairment and restaurant closure costs | | $ | 28,127 |
| | $ | 6,914 |
| | $ | 34,426 |
| |
| | | | December 29, 2019 | | December 30, 2018 | | December 31, 2017 |
| Asset impairment | | | $ | 15,094 |
| | $ | 28,127 |
| | $ | 6,914 |
|
| Executive transition and severance | | | 3,450 |
| | — |
| | — |
|
| Board and stockholder matter costs | | | 3,261 |
| | — |
| | — |
|
| Executive retention | | | 980 |
| | — |
| | — |
|
| Restaurant closures and refranchising | | | (1,187 | ) | | — |
| | — |
|
| Litigation contingencies | | 4,795 |
| | — |
| | 3,900 |
| | — |
| | 4,795 |
| | — |
|
| Reorganization costs | | 3,273 |
| | — |
| | 1,322 |
| | — |
| | 3,273 |
| | — |
|
| Smallwares disposal | | 2,936 |
| | — |
| | — |
| | — |
| | 2,936 |
| | — |
|
| Other charges | | $ | 39,131 |
| | $ | 6,914 |
| | $ | 39,648 |
| | $ | 21,598 |
| | $ | 39,131 |
| | $ | 6,914 |
|
Asset Impairment and Restaurant Closure Costs
For fiscal years 2018, 2017, and 2016, asset impairment and restaurant closure costs consisted of the following:
Restaurant Impairment. During 2018,2019, the Company determined 41long-lived assets at 29 Company-owned restaurants were impaired 19 of which had immaterial impairments, and recognized a non-cash impairment charge of $28.1$15.1 million. During 20172018 and 2016,2017, the Company impaired long-lived assets of 1341 and 1913 Company-owned restaurants and recognized non-cash impairment charges of $28.1 million and $6.9 million, and $24.4 million.respectively. 19 of the 41 restaurants impaired in 2018 had immaterial impairments.
The Company recognized the asset impairment charges resulting from the continuing and projected future results of these restaurants, primarily through projected cash flows. The fair value measurement for asset impairment is based on significant inputs not observed in the market and thus represents a level 3 fair value measurement. Each restaurant’s past and present operating performance was reviewed in combination with projected future results, primarily through projected undiscounted cash flows. The Company compared the carrying amount of each restaurant’s assets to its fair value as estimated by management. The fair value of the long-lived assets is generally determined using a discounted cash flow projection model. In certain cases, management uses other market information, when available, to estimate the fair value of a restaurant. The impairment charges represent the excess of each restaurant’s carrying amount over its estimated fair value.
The Company recognized a $0.8 million asset impairment charge due to the relocation of a restaurant during 2016.Executive Transition and Severance
Impairment of Software. During the fourth quarter of 2016, the Company determined certain software related to its Enterprise Resource Planning (“ERP”) system would be obsolete upon migration to a cloud-based ERP system in 2017. The Company also determined certain software in development for supply chain management would not meet the Company’s requirements if it were implemented. As a result,2019, the Company recorded $3.5 million of executive transition and severance costs primarily related to the transition and realignment of our executive team, including the appointment of a $2.5 million impairment charge to write downnew CEO in the capitalized costs associated with this software.third quarter of 2019.
Board and Stockholder Matter Costs
During 2019, the Company recorded $3.3 million of board and stockholder matter costs primarily related to the recruitment and appointment of the three new board members and the adoption of a shareholder rights plan.
Executive Retention
During 2019, the Company recorded $1.0 million of executive retention costs related to payments made to retain executive leadership believed to be critical to the ongoing operation of the Company during the uncertainty created following the retirement of our CEO in early April 2019 and throughout the subsequent transition period. The retention agreement is filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed with the SEC on April 21, 2019.
Restaurant Closures. and Refranchising
During 2019, the Company closed 18 restaurants resulting in a gain of $1.2 million. The gain on restaurant closures was driven by favorable lease terminations at the closed restaurant locations. Non-cash impairment charges relating to restaurant closures are included in Restaurant Closures and Refranchising component of other charges.
During 2018 and 2017, the Company closed four restaurants.and three restaurants, respectively. The related restaurant closure costs were immaterial.
During 2017, the Company closed two Red Robin restaurants at the end of their lease terms and closed one Red Robin restaurant that was underperforming relative to Company expectations. The related restaurant closure costs were immaterial.
During 2016, the Company closed nine Red Robin Burger Works restaurants, smaller non-traditional prototypes with a limited menu and limited service, that were underperforming relative to Company expectations; and recognized $6.7 million of restaurant closure costs, which comprised $3.7 million in fixed asset disposal costs, $2.7 million in charges related to future lease obligations and contract termination costs, immaterial termination benefits, inventory write off costs, and other closure-related costs.
During 2016, the Company closed two Red Robin restaurants at the end of their lease terms, closed one Red Robin restaurant and sold the property for an immaterial loss, and temporarily closed one Red Robin restaurant which reopened in 2017.
The Company evaluates restaurants that are sold or closed and allocates goodwill based on the relative fair value of the disposal restaurants to the Company’s reporting unit. Since restaurant operations are typically valued based on cash flow from operations, the Company compares the historical cash flow from the closed restaurants to the cash flow from the reporting unit to determine the relative value. The goodwill allocated to the restaurants closed in 2019, 2018, 2017, and 20162017 was immaterial.
Litigation Contingencies
In 2018, the Company recorded $4.8 million of litigation contingencies for employment-related claims. In 2016,
Smallwares Disposal
During 2018, the Company recorded $3.9$2.9 million of litigation contingencies for employment-related claims.costs related to the disposal of smallwares.
Reorganization Costs
During 2018, the Company recorded $3.3 million of severance costs related to the reorganization in first quarter 2018. During the fourth quarter of 2016, the Company recorded $1.3 million of severance costs related to Company reorganization in the U.S. and Canada.
Smallwares Disposal
During 2018, the Company recorded $2.9 million of costs related to the disposal of smallwares.
5. Property and Equipment
Property and equipment consist of the following at December 29, 2019 and December 30, 2018 and December 31, 2017 (in thousands):
| | | | | 2018 | | 2017 | December 29, 2019 | | December 30, 2018 |
| Land | | $ | 41,850 |
| | $ | 41,850 |
| $ | 41,850 |
| | $ | 41,850 |
|
| Buildings | | 110,050 |
| | 111,205 |
| 96,944 |
| | 110,050 |
|
| Leasehold improvements | | 706,648 |
| | 721,369 |
| 708,954 |
| | 706,648 |
|
| Furniture, fixtures and equipment | | 395,438 |
| | 385,227 |
| |
| Furniture, fixtures, and equipment | | 411,874 |
| | 395,438 |
|
| Construction in progress | | 8,731 |
| | 18,639 |
| 13,697 |
| | 8,731 |
|
| | | 1,262,717 |
| | 1,278,290 |
| |
| Property and equipment, at cost | | 1,273,319 |
| | 1,262,717 |
|
| Accumulated depreciation and amortization | | (697,575 | ) | | (640,139 | ) | (755,306 | ) | | (697,575 | ) |
| Property and equipment, net | | $ | 565,142 |
| | $ | 638,151 |
| $ | 518,013 |
| | $ | 565,142 |
|
Depreciation and amortization expense on property and equipment including assets under capital lease, was $87.4 million in 2019, $91.0 million in 2018, and $87.6 million in 2017, and $81.6 million in 2016.
2017.
6. Goodwill and Intangible Assets
The following table presents goodwill as of December 29, 2019 and December 30, 2018 and December 31, 2017 (in thousands).
|
| | | | | | | | |
| | | 2018 | | 2017 |
| Balance at beginning of year | | $ | 96,979 |
| | $ | 95,935 |
|
| Acquisition | | — |
| | — |
|
| Foreign currency translation adjustment | | (1,141 | ) | | 1,044 |
|
| Balance at end of year | | $ | 95,838 |
| | $ | 96,979 |
|
|
| | | | | | | | |
| | | 2019 | | 2018 |
| Balance, beginning | | $ | 95,838 |
| | $ | 96,979 |
|
| Foreign currency translation adjustment | | 559 |
| | (1,141 | ) |
| Balance, end | | $ | 96,397 |
| | $ | 95,838 |
|
The Company recorded no goodwill impairment losses in the periodsperiod presented in the table above table or any prior periods.
The following table presents intangible assets as of December 30, 201829, 2019 and December 31, 201730, 2018 (in thousands):
| | | | | 2018 | | 2017 | | December 29, 2019 | | December 30, 2018 |
| | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Intangible assets subject to amortization: | | | | | | | | | | | | | | | | | | | | | | | | |
| Franchise rights | | $ | 54,404 |
| | $ | (33,160 | ) | | $ | 21,244 |
| | $ | 54,447 |
| | $ | (29,685 | ) | | $ | 24,762 |
| | $ | 53,336 |
| | $ | (35,896 | ) | | $ | 17,440 |
| | $ | 54,404 |
| | $ | (33,160 | ) | | $ | 21,244 |
|
| Leasehold interests | | 13,001 |
| | (8,136 | ) | | 4,865 |
| | 13,001 |
| | (7,459 | ) | | 5,542 |
| | 13,001 |
| | (8,794 | ) | | 4,207 |
| | 13,001 |
| | (8,136 | ) | | 4,865 |
|
| Liquor licenses and other | | 10,810 |
| | (9,770 | ) | | 1,040 |
| | 10,148 |
| | (9,667 | ) | | 481 |
| | 10,737 |
| | (9,869 | ) | | 868 |
| | 10,810 |
| | (9,770 | ) | | 1,040 |
|
| | | $ | 78,215 |
| | $ | (51,066 | ) | | $ | 27,149 |
| | $ | 77,596 |
| | $ | (46,811 | ) | | $ | 30,785 |
| | $ | 77,074 |
| | $ | (54,559 | ) | | $ | 22,515 |
| | $ | 78,215 |
| | $ | (51,066 | ) | | $ | 27,149 |
|
| Indefinite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Liquor licenses | | $ | 7,460 |
| | $ | — |
| | $ | 7,460 |
| | $ | 7,488 |
| | $ | — |
| | $ | 7,488 |
| |
| Liquor licenses and other | | | $ | 7,460 |
| | $ | — |
| | $ | 7,460 |
| | $ | 7,460 |
| | $ | — |
| | $ | 7,460 |
|
| Intangible assets, net | | $ | 85,675 |
| | $ | (51,066 | ) | | $ | 34,609 |
| | $ | 85,084 |
| | $ | (46,811 | ) | | $ | 38,273 |
| | $ | 84,534 |
| | $ | (54,559 | ) | | $ | 29,975 |
| | $ | 85,675 |
| | $ | (51,066 | ) | | $ | 34,609 |
|
No impairment charges were recorded related to indefinite-lived intangibles in 2019, 2018, 2017, and 2016.2017. There were immaterial impairments of franchise rights and liquor licenses subject to amortization related to the 29 restaurants impaired in 2019, immaterial impairments of franchise rights, leasehold interests, and liquor licenses subject to amortization related to the
41 restaurants impaired in 2018, and immaterial impairments of franchise rights and liquor licenses subject to amortization related to the 13 restaurants impaired in 2017, which are discussed in Note 4, Other Charges. There were no other impairments of intangible assets subject to amortization in 2019, 2018, 2017, or 2016.2017.
The aggregate amortization expense related to intangible assets subject to amortization for 2019, 2018, and 2017 and 2016 was $4.4 million, $4.3 million, and $4.9 million, and $5.1 million.respectively.
The estimated aggregate future amortization expense as of December 30, 201829, 2019 is as follows (in thousands):
| | | 2019 | $ | 4,285 |
| |
| 2020 | 3,770 |
| | $ | 3,684 |
|
| 2021 | 3,341 |
| | 3,258 |
|
| 2022 | 2,897 |
| | 2,830 |
|
| 2023 | 2,647 |
| | 2,593 |
|
| 2024 | | | 2,300 |
|
| Thereafter | 10,209 |
| | 7,850 |
|
| | $ | 27,149 |
| | $ | 22,515 |
|
7. Accrued Payroll and Payroll-relatedPayroll-Related Liabilities, and Accrued Liabilities and Other Current Liabilities
Accrued payroll and payroll-related liabilities consist of the following at December 30, 201829, 2019 and December 31, 201730, 2018 (in thousands):
| | | | | 2018 | | 2017 | December 29, 2019 | | December 30, 2018 |
| Payroll and payroll-related taxes | | $ | 18,192 |
| | $ | 10,363 |
| $ | 16,736 |
| | $ | 18,192 |
|
| Corporate and restaurant incentive compensation | | 4,227 |
| | 8,579 |
| |
| Workers compensation insurance | | 6,825 |
| | 6,141 |
| 5,720 |
| | 6,825 |
|
| Accrued vacation | | 5,753 |
| | 5,581 |
| 5,451 |
| | 5,753 |
|
| Corporate and restaurant incentive compensation | | 5,397 |
| | 4,227 |
|
| Other | | 2,925 |
| | 2,113 |
| 1,917 |
| | 2,925 |
|
| | | $ | 37,922 |
| | $ | 32,777 |
| |
| Accrued payroll and payroll-related liabilities | | $ | 35,221 |
| | $ | 37,922 |
|
Accrued liabilities and other current liabilities consist of the following at December 30, 201829, 2019 and December 31, 201730, 2018 (in thousands):
| | | | | 2018 | | 2017 | December 29, 2019 | | December 30, 2018 |
| State and city sales taxes | | $ | 5,798 |
| | $ | 10,449 |
| |
| State and city sales tax payable | | $ | 6,776 |
| | $ | 5,798 |
|
| General liability insurance | | 6,826 |
| | 8,727 |
| 6,622 |
| | 6,826 |
|
| Legal | | 4,910 |
| | 484 |
| 4,290 |
| | 4,910 |
|
| Real estate, personal property, state income and other taxes payable | | 4,522 |
| | 3,631 |
| |
| Utilities | | 2,915 |
| | 3,042 |
| 2,791 |
| | 2,915 |
|
| Real estate, personal property, state income, and other taxes payable | | 1,135 |
| | 4,522 |
|
| Other | | 13,872 |
| | 9,967 |
| 7,789 |
| | 13,086 |
|
| | | $ | 38,843 |
| | $ | 36,300 |
| |
| Accrued liabilities and other current liabilities | | $ | 29,403 |
| | $ | 38,057 |
|
8. Borrowings
Borrowings as of December 30, 201829, 2019 and December 31, 201730, 2018 are summarized below (in thousands):
|
| | | | | | | | | | | | | | |
| | | 2018 | | 2017 |
| | | Borrowings | | Weighted Average Interest Rate | | Borrowings | | Weighted Average Interest Rate |
| Revolving credit facility and other long-term debt | | $ | 193,375 |
| | 3.20 | % | | $ | 266,375 |
| | 3.50 | % |
| Capital lease obligations | | 10,200 |
| | 4.60 | % | | 10,938 |
| | 4.68 | % |
| Total debt and capital lease obligations | | 203,575 |
| | |
| | 277,313 |
| | |
| Less: Current portion | | (786 | ) | | |
| | (741 | ) | | |
|
| Long-term debt and capital lease obligations | | $ | 202,789 |
| | |
| | $ | 276,572 |
| | |
|
|
| | | | | | | | | | | | | |
| | December 29, 2019 | | December 30, 2018 |
| | Borrowings | | Weighted Average Interest Rate | | Borrowings | | Weighted Average Interest Rate |
| Revolving credit facility and other long-term debt | $ | 206,875 |
| | 5.10 | % | | $ | 193,375 |
| | 4.20 | % |
| Total Debt | 206,875 |
| | | | 193,375 |
| | |
| Less: Current portion | — |
| | | | — |
| | |
| Long-term debt | $ | 206,875 |
| | | | $ | 193,375 |
| | |
Maturities of long-term debt and capital lease obligations as of December 30, 201829, 2019 are as follows (in thousands):
| | | 2019 | $ | 786 |
| |
| 2020 | 837 |
| $ | — |
|
| 2021 | 193,391 |
| 206,000 |
|
| 2022 | 762 |
| — |
|
| 2023 | 750 |
| — |
|
| 2024 | | — |
|
| Thereafter | 7,049 |
| 875 |
|
| | $ | 203,575 |
| $ | 206,875 |
|
Revolving Credit Facility
On June 30, 2016, the Company replaced its existing credit facility withentered into a new credit facility (the “New Credit“Credit Facility”) with the same group of lenders, which providedprovides for a $400 million revolving line of credit with a sublimit for the issuance of up to $25 million in letters of credit and swingline loans up to $15 million, and includedmillion. The Credit Facility also includes an option to increase the amount available under the credit facility up to an additional $100 million in the aggregate, subject to the lenders’lenders' participation.
The New Credit Facility also provides a Canadian Dollar borrowing sublimit equivalent to $20 million. Borrowings under the New Credit Facility, if denominated in U.S. Dollars, are subject to rates based on the London Interbank Offered Rate (“LIBOR”) plus a spread based on leverage or a base rate plus a spread based on leverage (base rate is the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50%, and (c) LIBOR for an Interest Period of one month plus 1%). Borrowings under the New Credit Facility, if denominated in Canadian Dollars, are subject to rates based on LIBOR plus a spread based on leverage or a base rate plus a spread based on leverage (base rate is the highest of (a) the Canadian Prime Rate and (b) the Canadian Dealer Offered Rate (“CDOR Rate”) for an interest period of one month plus 1%).
On April 13, 2017,August 19, 2019, the Company entered into a firstsecond amendment (the “Amendment”) to the New Credit Facility. The Amendment increasedincreases the lease adjusted leverage ratio to 5.25x5.0 through October 1, 2017 before stepping downDecember 29, 2019. In addition, the Amendment revises the definition of permitted acquisitions under the Credit Facility to 5.0x through July 15, 2018 and returningcorrespond with the change to 4.75x thereafter. The Amendment also provides for additional pricing tiers that increase LIBOR spread rates and commitment fees to the extent the Company’s lease adjusted leverage ratio exceeds 4.75x, in addition to revising terms for permitted acquisitions and investments underclarifies the New Credit Facility.classification of existing capital and operating leases. The AmendmentCompany's lease adjusted leverage ratio was effective through October 7, 2018.
4.72 as of December 29, 2019.
The New Credit Facility matures on June 30, 2021. Borrowings under the New Credit Facility are secured by first priority liens and security interests in substantially all of the Company’sCompany's assets, including the capital stock of certain Company subsidiaries, and are available for financing activities including restaurant construction costs, working capital, and general corporate purposes, including, among other uses, to refinance certain indebtedness, permitted acquisitions, and redemption of capital stock. As of December 29, 2019, the Company had outstanding borrowings under the Credit Facility of $206.0 million, in addition to amounts issued under letters of credit of $7.5 million. As of December 30, 2018, the Company had outstanding borrowings under the New Credit Facility of $192.5 million, in addition to amounts issued under letters of credit of $7.8 million, which reducedmillion. The amounts issued under letters of credit reduce the amount available under the credit facilityCredit Facility but were not recorded as debt. No outstanding borrowings were considered short-term as of December 29, 2019 and December 30, 2018.
Loan origination costs associated with the New Credit Facility were $1.1 million and are included as deferred costs in Other assets, net in the accompanying consolidated balance sheets, except for the current portion of these costs which is included in Prepaid expenses and other current assets. In the first quarter of 2017, the Company recorded an additional $0.7 million in debt issuance costs related to the Amendment to the New Credit Facility. Unamortized debt issuance costs were $1.7$1.0 million and $2.4$1.7 million as of December 29, 2019 and December 30, 2018, and December 31, 2017.respectively.
The Company is subject to a number of customary covenants under its New Credit Facility, including limitations on additional borrowings, acquisitions, capital expenditures, share repurchases, lease commitments, dividend payments, and requirements to maintain certain financial ratios. The Company was in compliance with such covenants as of December 30, 2018.29, 2019.
New Credit Facility
On January 10, 2020, the Company replaced its prior Credit Facility with a new Amended and Restated Credit Agreement (the "New Credit Facility") which provides for a $161.5 million revolving line of credit and a $138.5 million term loan for a total borrowing capacity of $300 million. In addition, the New Credit Facility allows for the issuance of $25 million in letters of credit, swingline loans up to $15 million, and the option to increase the borrowing capacity by up to an additional $100 million subject to lenders' participation. The New Credit Facility also provides for a Canadian Dollar borrowing sublimit equivalent to $20 million and limits sale leasebacks transactions to $50 million.
In connection with the termination of the Credit Facility and new borrowings under the New Credit Facility, the Company paid off all outstanding borrowings, accrued interest, and fees under the Credit Facility. Borrowings refinanced under the New Credit Facility totaled $186.6 million, net of loan origination fees.
The New Credit Facility will mature on January 10, 2025. No amortization is required with respect to the revolving line of credit, and the term loans require quarterly principal payments at a rate of 7.0% per annum of the original principal balance. Borrowings under the revolving line of credit and term loans denominated in U.S. Dollars, are subject to rates based on the London Interbank Offered Rate (“LIBOR”) plus a spread based on leverage or a base rate plus a spread based on leverage (base rate is the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50%, and (c) LIBOR for an Interest Period of one month plus 1%). Borrowings denominated in Canadian Dollars, are subject to rates based on LIBOR plus a spread based on leverage or a base rate plus a spread based on leverage (base rate is the highest of (a) the Canadian Prime Rate and (b) the Canadian Dealer Offered Rate (“CDOR Rate”) for an interest period of one month plus 1%).
The publication of LIBOR is expected to discontinue in December 2021, however, we anticipate an amended credit agreement will be executed at the new applicable interest rate.
Borrowings under the New Credit Facility are secured by substantially all of the assets of the Company and are available to: (i) refinance certain existing indebtedness of the Company and its subsidiaries, (ii) finance restaurant construction costs, (iii) pay costs, fees, and expenses in connection with such new restaurant construction, (iv) pay any fees and expenses in connection with the New Credit Facility, and (v) provide for the working capital and general corporate requirements of the Company, including permitted acquisitions and the redemption of capital stock.
The Company will continue to be subject to a number of customary covenants under the New Credit Facility, including limitations on additional borrowings, acquisitions, capital expenditures, share repurchases, lease commitments, dividend payments, and requirements to maintain certain financial ratios including the lease adjusted leverage ratio. From the closing date of the New Credit Facility to the end of the Company's fiscal year 2020, the maximum allowed lease adjusted leverage ratio is 5.0. The maximum allowable lease adjusted leverage ratio then decreases to 4.75 during fiscal year 2021 and decreases again to 4.50 during fiscal year 2022 and thereafter.
9. Fair Value Measurements
Fair value measurements are made under a three-tier fair value hierarchy, which prioritizes the inputs used in the measuring of fair value:
| |
| Level 1: | Observable inputs that reflect unadjusted quotedquote prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| |
| Level 2: | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. |
| |
| Level 3: | Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying amounts of the Company’s cash and cash equivalents, accounts receivables,receivable, accounts payable, and accounts payablescurrent accrued expenses and other liabilities approximate fair value due to the short termshort-term nature or maturity of the instruments.
The Company maintains a rabbi trust to fund obligations under a deferred compensation plan. See Note 16,15, Employee Benefit Programs. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities and carried at fair value, and are included in Other assets, net in the accompanying consolidated balance sheets. Fair market value of mutual funds is measured using level 1 inputs (quoted prices for identical assets in active markets). The value of the deferred compensation plan liability is dependent upon the fair value of the assets held in the rabbi trust and therefore is not measured at fair value.
The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of December 30, 201829, 2019 and December 31, 201730, 2018 (in thousands):
| | | | | December 30, 2018 | | Level 1 | | Level 2 | | Level 3 | | December 29, 2019 | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | | | | | | | | |
| Investments in rabbi trust | | $ | 8,198 |
| | $ | 8,198 |
| | $ | — |
| | $ | — |
| | $ | 7,337 |
| | $ | 7,337 |
| | $ | — |
| | $ | — |
|
| Total assets measured at fair value | | $ | 8,198 |
| | $ | 8,198 |
| | $ | — |
| | $ | — |
| | $ | 7,337 |
| | $ | 7,337 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | Level 1 | | Level 2 | | Level 3 | | December 30, 2018 | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | | | | | | | | |
| Investments in rabbi trust | | $ | 9,292 |
| | $ | 9,292 |
| | $ | — |
| | $ | — |
| | $ | 8,198 |
| | $ | 8,198 |
| | $ | — |
| | $ | — |
|
| Total assets measured at fair value | | $ | 9,292 |
| | $ | 9,292 |
| | $ | — |
| | $ | — |
| | $ | 8,198 |
| | $ | 8,198 |
| | $ | — |
| | $ | — |
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as property, plant and equipment, goodwill, and other intangible assets. These assets are measured at fair value if determined to be impaired.
Other thanDuring 2019 and 2018, the Company measured non-financial assets for impairment semi-annually using continuing and projected future cash flows, as discloseddiscussed in Note 4, Other Charges, as of December 30, 2018which were based on significant inputs not observable in the market and December 31, 2017, the Company had no non-financial assets or liabilities that were measured usingthus represented a level 3 inputs.fair value measurement.
Based on our 2019 and 2018 semi-annual impairment analyses, we impaired long-lived assets at 29 and 41 company-owned restaurants with carrying values of $17.3 million and $34.1 million, respectively. 19 of the 41 restaurants impaired in 2018 has immaterial impairments. We determined the fair value of these long-lived assets in 2019 and 2018 to be $2.2 million and $6.0 million, respectively, based on level 3 fair value measurements.
Disclosures of Fair Value of Other Assets and Liabilities
The Company’s liabilitiesliability under its credit facility and capital leases areCredit Facility is carried at historical cost in the accompanying consolidated balance sheets. Both the credit facility and the Company’s capital lease obligations are considered to be Level 2 instruments. The carrying value of the credit facilityCredit Facility approximates fair value as the interest rate on this instrument approximates current market rates. For disclosure purposes,The interest rate on the Company estimated theCredit Facility represents a level 2 fair value input.
10. Leases
Adoption of FASB Accounting Standards Update ("ASU") 2016-02
On January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) ("Topic 842") along with related clarifications and improvements using the modified retrospective approach without application to prior periods. This guidance requires the recognition of liabilities for lease obligations and corresponding right-of-use assets on the balance sheet and disclosure of key information about leasing arrangements. We applied the practical expedients that do not require us to reassess existing contracts for embedded leases, to separate lease and non-lease components for our population of real estate assets, or to reassess lease classification or initial direct costs.
The effect of the capitalchanges made to our consolidated December 31, 2018 balance sheet as a result of the adoption of Topic 842 was as follows (in thousands):
|
| | | | | | | | | | | | |
| | | Balance at December 30, 2018 | | Adjustments due to Topic 842 | | Balance at December 31, 2018 |
| | | | |
| Balance sheet | | | | | | |
| Non-current assets | | | | | | |
| Right of use assets, net | | $ | — |
| | $ | 478,268 |
| | $ | 478,268 |
|
| Prepaid expenses and other current assets | | 27,576 |
| | (6,592 | ) | | 20,984 |
|
| | | | | | | |
| Current liabilities | | | | | | |
| Short-term portion of lease obligations | | 786 |
| | 40,606 |
| | 41,392 |
|
| Non-current liabilities | | | | | |
|
| Deferred Rent | | 75,675 |
| | (75,675 | ) | | — |
|
| Long-term portion of lease obligations | | 9,414 |
| | 506,745 |
| | 516,159 |
|
| | | | | | | |
| Stockholders’ equity: | | | | | | |
| Retained earnings | | $ | 376,341 |
| | $ | (15,172 | ) | | $ | 361,169 |
|
This change did not have any impact on our consolidated statement of operations or consolidated statement of cash flows.
Leases
The Company leases land, buildings, and equipment used in its operations under operating and finance leases. Our leases generally have remaining terms of 1-15 years, most of which include options to extend the leases for additional 5-year periods. Generally, the lease term is the minimum of the non-cancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 20 years.
We determine if a contract contains a lease at inception. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. We estimate this rate based on prevailing financial market conditions, comparable company and credit analysis, and management judgment.
Our leases typically contain rent escalations over the lease term. We recognize expense for these leases on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.
Some of our leases include rent escalations based on inflation indexes and fair market value adjustments. Certain leases contain contingent rental provisions that include a fixed base rent plus an additional percentage of the restaurant’s sales in excess of stipulated amounts. Operating lease liabilities are calculated using the prevailing index or rate at lease commencement. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Leases are included in right-of-use assets, net, short-term portion of lease obligations, using discounted cash flow analysis basedand long-term portion of lease liabilities on market rates obtained from independent third partiesour consolidated balance sheet as of December 29, 2019 as follows (in thousands):
|
| | | | | | | | | | | | |
| | | Finance | | Operating | | Total |
| Right of use assets, net | | $ | 7,552 |
| | $ | 418,696 |
| | $ | 426,248 |
|
| | | | | | | |
| Short-term portion of lease obligations | | 725 |
| | 41,974 |
| | 42,699 |
|
| Long-term portion of lease obligations | | 8,822 |
| | 456,613 |
| | 465,435 |
|
| Total | | $ | 9,547 |
| | $ | 498,587 |
| | $ | 508,134 |
|
We have elected the short-term lease recognition exemption for similar typesall applicable classes of debt.underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.
The following table presentscomponents of lease expense, including variable lease costs primarily consisting of common area maintenance charges and real estate taxes, are included in occupancy on our consolidated statement of operations as follows (in thousands):
|
| | | | |
| | | Year Ended |
| | | December 29, 2019 |
| Operating lease cost | | $ | 75,496 |
|
| Finance lease cost: | | |
| Amortization of right of use assets | | 793 |
|
| Interest on lease liabilities | | 544 |
|
| Total finance lease cost | | 1,337 |
|
| Variable lease cost | | 29,300 |
|
| Total lease costs | | $ | 106,133 |
|
Maturities of our lease liabilities as of December 29, 2019 were as follows (in thousands):
|
| | | | | | | | | | | |
| | Finance Leases | | Operating Leases | | Total |
| 2020 | $ | 1,065 |
| | $ | 70,303 |
| | $ | 71,368 |
|
| 2021 | 1,133 |
| | 75,990 |
| | 77,123 |
|
| 2022 | 979 |
| | 73,702 |
| | 74,681 |
|
| 2023 | 916 |
| | 71,670 |
| | 72,586 |
|
| 2024 | 932 |
| | 68,468 |
| | 69,400 |
|
| Thereafter | 7,506 |
| | 379,644 |
| | 387,150 |
|
| Total future lease liability | 12,531 |
| | 739,777 |
| | 752,308 |
|
| Less imputed interest | 2,984 |
| | 241,190 |
| | 244,174 |
|
| Present value of lease liability | $ | 9,547 |
| | $ | 498,587 |
| | $ | 508,134 |
|
As previously disclosed in our 2018 Annual Report on Form 10-K and under the carrying value and estimated fair valueprevious lease accounting guidance, maturities of Company’s capital lease obligationsliabilities were as follows as of December 30, 2018 and December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | December 30, 2018 | | December 31, 2017 |
| | | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| Capital lease obligations | | $ | 10,200 |
| | $ | 10,143 |
| | $ | 10,938 |
| | $ | 11,563 |
|
|
| | | | | | | | |
| | | Capital Leases | | Operating Leases |
| 2019 | | $ | 1,234 |
| | $ | 80,367 |
|
| 2020 | | 1,242 |
| | 76,936 |
|
| 2021 | | 1,240 |
| | 70,419 |
|
| 2022 | | 1,063 |
| | 61,649 |
|
| 2023 | | 1,019 |
| | 54,121 |
|
| Thereafter | | 7,552 |
| | 206,879 |
|
| Total | | 13,350 |
| | $ | 550,371 |
|
| Less amount representing interest | | (3,150 | ) | | |
|
| Present value of future minimum lease payments | | 10,200 |
| | |
|
| Less current portion | | (786 | ) | | |
|
| Long-term capital lease obligations | | $ | 9,414 |
| | |
|
10. Supplemental Disclosurescash flow information in thousands (except other information) related to Consolidated Statements of Cash Flowsleases is as follows:
|
| | | | | | | | | | | | |
| (In thousands) | | 2018 | | 2017 | | 2016 |
| Cash paid during the year for: | | | | | | |
| Income taxes | | $ | 2,486 |
| | $ | 3,999 |
| | $ | 4,651 |
|
| Interest, net of amounts capitalized | | 10,013 |
| | 10,372 |
| | 6,462 |
|
| Non-cash investing and financing activities: | | | | | | |
| Change in construction related payables | | (507 | ) | | (5,951 | ) | | (15,830 | ) |
| Capital lease obligations incurred for real estate and equipment purchases | | — |
| | 140 |
| | 4,133 |
|
|
| | | | |
| | | Year Ended |
| | | December 29, 2019 |
| Cash flows from operating activities | | |
| Cash paid related to lease liabilities | | |
| Operating leases | | $ | 78,260 |
|
| Finance leases | | 512 |
|
| Cash flows from financing activities | | |
| Cash paid related to lease liabilities | | |
| Finance leases | | 817 |
|
| Cash paid for amounts included in the measurement of lease liabilities | | $ | 79,589 |
|
| | | |
| Right of use assets obtained in exchange for operating lease obligations following the adoption of Topic 842 (Leases) | | $ | 12,580 |
|
| Right of use assets obtained in exchange for finance lease obligations following the adoption of Topic 842 (Leases) | | $ | 1,606 |
|
| | | |
| Other information related to operating leases as follows: | | |
| Weighted average remaining lease term | | 10.7 years |
|
| Weighted average discount rate | | 7.4 | % |
| | | |
| Other information related to financing leases as follows: | | |
| Weighted average remaining lease term | | 12.4 years |
|
| Weighted average discount rate | | 4.9 | % |
11. Income Taxes
Income (loss) before income taxes includes the following components for the fiscal years ended December 29, 2019, December 30, 2018, and December 31, 2017 and December 25, 2016 (in thousands):
| | | | | 2018 | | 2017 | | 2016 | | | | | | | |
| | | | | | | | | 2019 | | 2018 | | 2017 |
| U.S. | | $ | (16,045 | ) | | $ | 32,208 |
| | $ | 7,806 |
| | $ | (14,549 | ) | | $ | (16,045 | ) | | $ | 32,208 |
|
| Foreign | | (5,365 | ) | | (3,188 | ) | | (3,018 | ) | | (7,688 | ) | | (5,365 | ) | | (3,188 | ) |
| | | $ | (21,410 | ) | | $ | 29,020 |
| | $ | 4,788 |
| | $ | (22,237 | ) | | $ | (21,410 | ) | | $ | 29,020 |
|
The benefit for income taxes for the fiscal years ended December 29, 2019, December 30, 2018, and December 31, 2017 and December 25, 2016 consist of the following (in thousands):
| | | | | 2018 | | 2017 | | 2016 | | 2019 | | 2018 | | 2017 |
| Current: | | | | | | | | | | | | |
| Federal | | $ | 2,043 |
| | $ | 2,304 |
| | $ | 2,503 |
| | $ | (3,054 | ) | | $ | 2,043 |
| | $ | 2,304 |
|
| State | | 1,579 |
| | 3,175 |
| | 2,078 |
| | (1,687 | ) | | 1,579 |
| | 3,175 |
|
| Foreign | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total current income tax (benefit) expense | | | $ | (4,741 | ) | | $ | 3,622 |
| | $ | 5,479 |
|
| Deferred: | | | | | | | | | | | | |
| Federal | | (16,688 | ) | | (6,045 | ) | | (9,407 | ) | | $ | (10,994 | ) | | $ | (16,688 | ) | | $ | (6,045 | ) |
| State | | (2,068 | ) | | (680 | ) | | (2,300 | ) | | 1,354 |
| | (2,068 | ) | | (680 | ) |
| Foreign | | 143 |
| | 247 |
| | 189 |
| | 47 |
| | 143 |
| | 247 |
|
| | | $ | (14,991 | ) | | $ | (999 | ) | | $ | (6,937 | ) | |
| Total deferred income tax benefit | | | (9,593 | ) | | (18,613 | ) | | (6,478 | ) |
| Income tax benefit | | | $ | (14,334 | ) | | $ | (14,991 | ) | | $ | (999 | ) |
The Company had net operating loss carryforwards for tax purposes of $4.7 million as of December 29, 2019. We expect to utilize all net operating loss carryforwards for federal tax purposes, but state tax carryforwards may begin to expire between 2024 and 2039.
The reconciliation between the income tax provision and the amount of income tax computed by applying the U.S. federal statutory rate to income (loss) before the provision for income taxes as shown in the accompanying consolidated statements of operations and comprehensive (loss) income, (loss), for fiscal years ended December 29, 2019, December 30, 2018, and December 31, 2017 and December 25, 2016 is as follows:
| | | | | 2018 | | 2017 | | 2016 | | 2019 | | 2018 | | 2017 |
| Tax provision at U.S. federal statutory rate | | 21.0 | % | | 35.0 | % | | 35.0 | % | | 21.0 | % | | 21.0 | % | | 35.0 | % |
| State income taxes | | 2.8 |
| | 5.0 |
| | (3.0 | ) | | 2.2 |
| | 2.9 |
| | 5.0 |
|
| FICA tip tax credits | | 49.2 |
| | (32.4 | ) | | (183.8 | ) | | 46.0 |
| | 49.9 |
| | (32.4 | ) |
| Foreign taxes versus U.S statutory rate | | 0.9 |
| | 0.7 |
| | 6.7 |
| | 0.8 |
| | 0.9 |
| | 0.7 |
|
| Valuation allowance on deferred income tax assets | | (7.4 | ) | | 4.5 |
| | 19.3 |
| | (9.1 | ) | | (7.5 | ) | | 4.5 |
|
| Deferred tax remeasurement due to the Tax Act | | — |
| | (9.7 | ) | | — |
| | — |
| | — |
| | (9.7 | ) |
| Other tax credits | | 7.0 |
| | (6.5 | ) | | (27.7 | ) | | 6.1 |
| | 7.1 |
| | (6.5 | ) |
| Meals and entertainment | | (0.8 | ) | | 0.9 |
| | 6.6 |
| | (0.7 | ) | | (0.8 | ) | | 0.9 |
|
| Excess stock options | | (0.6 | ) | | (1.0 | ) | | — |
| | (2.9 | ) | | (0.6 | ) | | (1.0 | ) |
| Employee travel | | (2.0 | ) | | — |
| | — |
| | (0.1 | ) | | (2.1 | ) | | — |
|
| Other | | (1.0 | ) | | — |
| | 2.0 |
| | 1.2 |
| | (0.8 | ) | | — |
|
| Effective tax rate | | 69.1 | % | | (3.5 | )% | | (144.9 | )% | | 64.5 | % | | 70.0 | % | | (3.5 | )% |
The Company again had a tax benefit in 2018,all three years presented above, but due to the mathematical computation of tax benefit to book loss the effective tax rate above isin 2019 and 2018 are represented as a positive percentage. During 2017, and 2016, the Company had a tax benefit with book income, which presents the effective tax rate as a negative percentage. The decrease in the Company’s effective tax ratebenefit in 2019 is primarily attributable to a decrease in tax credits, and an increase in the valuation allowance for Canada. The increase in the Company’s effective tax benefit in 2018 is primarily attributable to the decrease in earnings before income tax, as well as the decrease in the federal statutory rate from 35% to 21% beginning in 2018. The increase in the Company’s effective tax rate in 2017 from 2016 was primarily attributable to the increase in earnings before income tax, partially offset by an increase in the FICA tip tax credit.
The Company’s federal and state deferred taxes at December 30, 201829, 2019 and December 31, 201730, 2018 are as follows (in thousands):
| | | | | 2018 | | 2017 | | 2019 | | 2018 |
| Deferred tax assets and (liabilities), net: | | | | | | | | |
| Deferred rent | | $ | 14,603 |
| | $ | 14,024 |
| |
| Leasing transactions | | | $ | 18,913 |
| | $ | 14,603 |
|
| Stock-based compensation | | 5,434 |
| | 5,267 |
| | 4,920 |
| | 5,434 |
|
| General business and other tax credits | | 25,872 |
| | 18,269 |
| | 40,409 |
| | 25,872 |
|
| Accrued compensation and related costs | | 5,938 |
| | 6,496 |
| | 5,970 |
| | 5,938 |
|
| Advanced payments | | 3,783 |
| | 2,846 |
| | 3,597 |
| | 3,783 |
|
| Other non-current deferred tax assets | | 5,412 |
| | 5,250 |
| | 7,584 |
| | 5,412 |
|
| Other non-current deferred tax liabilities | | (2,605 | ) | | (2,013 | ) | | (1,680 | ) | | (2,605 | ) |
| Goodwill | | (11,440 | ) | | (9,850 | ) | |
| Goodwill and other amortization, net | | | (12,138 | ) | | (11,003 | ) |
| Property and equipment | | 3,698 |
| | (8,027 | ) | | (757 | ) | | 3,698 |
|
| Franchise rights | | 437 |
| | (23 | ) | |
| Prepaid expenses | | (3,600 | ) | | (4,157 | ) | | (3,387 | ) | | (3,600 | ) |
| Supplies inventory | | (4,514 | ) | | (5,150 | ) | | (4,611 | ) | | (4,514 | ) |
| Subtotal | | 43,018 |
| | 22,932 |
| | 58,820 |
| | 43,018 |
|
| Valuation allowance | | (5,177 | ) | | (3,742 | ) | | (7,293 | ) | | (5,177 | ) |
| Net deferred tax asset | | 37,841 |
| | 19,190 |
| | 51,527 |
| | 37,841 |
|
| Non-current deferred tax asset | | 38,688 |
| | 19,932 |
| | 52,438 |
| | 38,688 |
|
| Non-current deferred tax liability | | (847 | ) | | (742 | ) | | (911 | ) | | (847 | ) |
| Total | | $ | 37,841 |
| | $ | 19,190 |
| | $ | 51,527 |
| | $ | 37,841 |
|
RealizationAs of netDecember 29, 2019, the Company had a deferred tax assets is dependent upon profitable operationsasset of $39 million related to federal tax credits, which expire at various dates between 2037 and 2039. We currently expect to realize the benefit of this deferred tax asset over the next 5 years based on current projections of future reversals of existing taxable temporary differences.income. Based on the Company’s evaluation of its other deferred tax assets, as of December 30, 2018, a valuation allowance of approximately $5.2$7.3 million has been recorded against the deferred tax asset for state income tax
credits and the deferred taxes of our foreign subsidiary, including the net operating loss carry forward, in order to measure only the portion of the deferred tax assets that more likely than not will be realized. However, the amount of the deferred tax assets considered realizable could be adjusted if estimates of future taxable income during the carry forward period are increased or reduced, or if there are differences in the timing or amount of future reversals of existing taxable temporary differences. The Company also assessed whether its valuation allowance analyses were affected by various aspects of the Tax Act, and concluded all deferred tax assets, except those already reduced due to a valuation allowance, will continue to be realized.
We do not provide for deferred taxes on the excess of the financial reporting basis over the tax basis in our investments in foreign subsidiaries that are essentially permanent in duration. We intend to reinvest earnings from our foreign subsidiaries, if any, in those operations for the foreseeable future. We have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs and, accordingly, we do not provide for U.S. federal income and foreign withholding tax on these earnings. While we do not expect to repatriate cash to the U.S., if these funds were distributed to the U.S., in the form of dividends or otherwise, we would be subject to additional U.S. income taxes. Determination of the amount of unrecognized deferred income tax liabilities on these earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs. In addition, the international provisions of the Tax Act do not have a material impact on the Company.
The Tax Act also repealed the corporate alternative minimum tax (“AMT”) for tax years beginning January 1, 2018, and provides that existing AMT credit carryovers are refundable beginning in 2018. The Company has approximately $1.6 million of AMT credit carryovers that are expected to be fully refunded between 2018 and 2021.
Pursuant to the guidance for uncertain tax positions, a taxpayer must be able to more likely than not sustain a position to recognize a tax benefit, and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit. The Company has analyzed filing positions in all of the federal, state, and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company’s federal and state returns are the 2014 through 2018 tax years.
The following table summarizes the Company’s unrecognized tax benefits at December 29, 2019 and December 30, 2018 and December 31, 2017 (in thousands):
| | | | | 2018 | | 2017 | | 2019 | | 2018 |
| Beginning of year | | $ | 287 |
| | $ | 170 |
| | $ | 304 |
| | $ | 287 |
|
| Increase due to current year tax positions | | 82 |
| | 172 |
| | 52 |
| | 82 |
|
| Due to decrease to a position taken in a prior year | | (7 | ) | | (2 | ) | | (170 | ) | | (7 | ) |
| Settlements | | (21 | ) | | (11 | ) | | (16 | ) | | (21 | ) |
| Reductions related to lapses | | (37 | ) | | (42 | ) | | (66 | ) | | (37 | ) |
| End of year | | $ | 304 |
| | $ | 287 |
| | $ | 104 |
| | $ | 304 |
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $0.3$0.1 million. The Company does not anticipate significant changes in the aggregate amount of unrecognized tax benefits within the next 12 months, other than nominal tax settlements.
The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. Penalties are recorded in Interest income and other, net, and interest paid or received is recorded in Interest expense in the consolidated statements of operations and comprehensive income (loss). The Company recorded immaterial interest expense on the identified tax liabilities in 2018, 2017, and 2016.
12. Commitments and Contingencies
Commitments
Leasing Activities—The Company leases land, buildings, and equipment used in its operations under operating leases. The Company’s operating leases have remaining non-cancelable terms ranging from less than one year to more than 15 years. These leases generally contain renewal options which permit the Company to renew the leases at defined contractual rates or prevailing market rates. Certain equipment leases also include options to purchase equipment at the end of the lease term. Certain leases provide for contingent rents, which are determined as a percentage of adjusted restaurant sales in excess of specified levels. The Company records a contingent rent liability and the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable. Certain lease agreements also require the Company to pay maintenance, insurance, and property tax costs. Rental expense related to land, building, and equipment leases for the fiscal years ended December 30, 2018, December 31, 2017, and December 25, 2016, which is recorded under Occupancy on the consolidated statements of operations and comprehensive income (loss), are as follows (in thousands):
|
| | | | | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Minimum rent | | $ | 78,259 |
| | $ | 77,778 |
| | $ | 73,605 |
|
| Contingent rent | | 1,299 |
| | 1,604 |
| | 1,676 |
|
| Equipment rent under operating leases | | 1,122 |
| | 1,024 |
| | 1,052 |
|
| | | $ | 80,680 |
| | $ | 80,406 |
| | $ | 76,333 |
|
The Company leases certain of its owned land, buildings, and equipment to outside parties under non-cancelable operating leases. Rental income was immaterial for 2018, 2017, and 2016.
Future minimum lease commitments under all leases as of December 30, 2018 are as follows (in thousands):
|
| | | | | | | | |
| | | Capital Leases | | Operating Leases |
| 2019 | | $ | 1,234 |
| | $ | 80,367 |
|
| 2020 | | 1,242 |
| | 76,936 |
|
| 2021 | | 1,240 |
| | 70,419 |
|
| 2022 | | 1,063 |
| | 61,649 |
|
| 2023 | | 1,019 |
| | 54,121 |
|
| Thereafter | | 7,552 |
| | 206,879 |
|
| Total | | 13,350 |
| | $ | 550,371 |
|
| Less amount representing interest | | (3,150 | ) | | |
|
| Present value of future minimum lease payments | | 10,200 |
| | |
|
| Less current portion | | (786 | ) | | |
|
| Long-term capital lease obligations | | $ | 9,414 |
| | |
|
At the end of 2018 and 2017, property and equipment included $30.4 million and $29.9 million of assets under capital lease, and $14.3 million and $12.3 million of related accumulated depreciation.
Future minimum rental income is immaterial.
Contingencies
In the normal course of business, there are various claims in process, matters in litigation, and other contingencies. These include claims resulting from “slip and fall” accidents, employment relatedemployment-related claims and claims alleging illness, injury, or other food quality, health, or operational issues. Evaluating contingencies related to litigation is a complex process involving subjective judgment on the potential outcome of future events, and the ultimate resolution of litigated claims may differ from our current analysis. We review the adequacy of accruals and disclosures pertaining to litigation matters each quarter and year end in consultation with legal counsel, and we assess the probability and range of possible losses associated with contingencies for potential accrual in the consolidated financial statements. While it is not possible to predict the outcome of these other suits, legal proceedings, and claims with certainty, management is of the opinion that adequate provision for potential losses associated with these other matters has been made in the consolidated financial statements.
Amounts recorded in the periods presented for litigation contingencies related to employment claims are disclosed in Note 4, Other Charges.
13. Franchise Operations
Results of franchise operations included in the consolidated statements of operations and comprehensive income (loss) for the fiscal years ended December 30, 2018, December 31, 2017, and December 25, 2016 consist of the following (in thousands):
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Franchise revenue: | | | | | |
| Royalty income | $ | 17,403 |
| | $ | 17,656 |
| | $ | 17,942 |
|
| Franchise fees | 6 |
| | 25 |
| | 13 |
|
| Total franchise revenue | $ | 17,409 |
| | $ | 17,681 |
| | $ | 17,955 |
|
14. Stockholders’ Equity
On August 9, 2018, the Company’s board of directors authorized an increase to the Company’s share repurchase program of approximately $21 million to a total of $75 million of the Company’s common stock. The increased share repurchase authorization became effective on August 9, 2018 and will terminate upon completing repurchases of $75 million of common stock unless otherwise terminated by the board. Purchases under the repurchase program may be made in open market or privately negotiated transactions. Purchases may be made from time to time at the Company’s discretion and the timing and amount of any share repurchases will be determined based on share price, market conditions, legal requirements, and other factors. The repurchase program does not obligate the Company to acquire any particular amount of common stock, and the Company may suspend or discontinue the repurchase program at any time. In 2018,2019, the Company purchased 42,600111,800 shares with an average purchase price of $34.61$30.86 per share for a total of $1.5 million.
On February 11, 2016, the Company’s board of directors re-authorized the Company's share repurchase program and approved the repurchase of up to $100 million of the Company’s common stock. In 2016, the Company repurchased 940,034 shares with an average purchase price of $49.02 per share for a total of $46.1 million.
On February 11, 2015, the Company’s board of directors authorized a repurchase of up to $100 million of the Company’s common stock. In 2015, the Company purchased 556,049 shares under this authorization, with an average purchase price of $71.93 per share for a total of $40.0$3.4 million.
15.14. Stock Incentive Plans
In May 2017, the Company’s stockholders approved the 2017 Performance Incentive Plan (the “2017 Stock Plan”). Following the date of approval, all grants are made under the 2017 Stock Plan and no new awards may be granted under the Second Amended and Restated 2007 Performance Plan (the “2007 Stock Plan”). The 2017 Stock Plan authorizes the issuance of stock options, stock appreciation rights (SARs), and other forms of awards granted or denominated in the Company common stock or unit of the Company's common stock, as well as cash performance awards pursuant to the plan. Persons eligible to receive awards under the 2017 Stock Plan include officers, employees, directors, consultants, and other service providers or any affiliate of the Company. The maximum number of shares of the Company’s common stock that may be issued or transferred pursuant to awards under the 2017 Stock Plan iswas 630,182 shares. The 2017 stock plan was amended in May 2019 to add an additional 660,000 shares, bringing the total to 1,290,182 as of December 29, 2019.
Vesting of the awards under the 2017 Stock Plan is determined at the date of grant by the plan administrator. Each award granted under the 2017 Stock Plan and 2007 Stock Plan fully vests, becomes exercisable and/or payable, as applicable, upon a change in control event. However, unless the individual award agreement provides otherwise, with respect to executive and certain other high level officers, upon the occurrence of a change in control, no award will vest unless such officers’ employment with the Company is terminated by the Company without cause during the two-year period following such change
in control event. Each award expires on such date as shall be determined at the date of grant; however, the maximum term of options, SARs, and other rights to acquire common stock under the plan is ten years after the initial date of the award, subject to provisions for further deferred payment in certain circumstances. Vesting of awards under these plans were generally time based over a period of one to four years. As of December 30, 2018, 374,01929, 2019, 242,579 options to acquire the Company’s common stock remained outstanding under the 2007 Stock Plan.Plan and under the 2017 stock plan.
Total stock-basedStock-based compensation costs recognized in 2019, 2018, and 2017 and 2016 were $3.3 million, $4.0 million, and $4.8 million, and $4.5 million,respectively, with related income tax benefits of $0.3 million, $0.5 million, and $1.5 million, and $0.4 million.respectively. As of December 30, 2018,29, 2019, there was $4.8$5.9 million of total unrecognized compensation cost, excluding estimated forfeitures, which isforfeitures. Unrecognized compensation costs are expected to be recognized over the weighted average remaining vesting period of approximately 2.10.88 years for stock options, 1.61.77 years for the restricted stock units, and 1.51.81 years for the performance stock units.
Stock Options
The tables below summarize the status of the Company’s stock option plans (in thousands, except per share data and exercise price):
| | | | | Stock Options | | Stock Options |
| | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| Outstanding, December 31, 2017 | | 469 |
| | $ | 54.60 |
| |
| Outstanding, December 30, 2018 | | | 483 |
| | $ | 56.62 |
|
| Granted | | 128 |
| | 60.42 |
| | — |
| | — |
|
| Forfeited/expired | | (95 | ) | | 57.98 |
| | (193 | ) | | 55.39 |
|
| Exercised | | (19 | ) | | 26.12 |
| | (2 | ) | | 21.10 |
|
| Outstanding, December 30, 2018 | | 483 |
| | $ | 56.62 |
| |
| Outstanding, December 29, 2019 | | | 288 |
| | $ | 58.33 |
|
|
| | | | | | | | | | | | | |
| | | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Years of Contractual Life | | Aggregate Intrinsic Value |
| Outstanding as of December 30, 2018 | | 483 |
| | $ | 56.62 |
| | 6.82 | | $ | 67 |
|
Vested and expected to vest as of December 30, 2018 (1) | | 444 |
| | $ | 56.62 |
| | 6.66 | | $ | 67 |
|
| Exercisable as of December 30, 2018 | | 246 |
| | $ | 55.59 |
| | 5.36 | | $ | 67 |
|
|
| | | | | | | | | | | | | |
| | | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Years of Contractual Life | | Aggregate Intrinsic Value |
| Outstanding as of December 29, 2019 | | 288 |
| | $ | 58.33 |
| | 4.73 | | $ | 70,458 |
|
Vested and expected to vest as of December 29, 2019 (1) | | 281 |
| | 58.34 |
| | 4.72 | | 70,458 |
|
| Exercisable as of December 29, 2019 | | 219 |
| | 58.47 |
| | 4.60 | | 70,458 |
|
(1) The expected to vest options are the result of applying the pre-vesting forfeiture rate assumption to total outstanding options. The Company applies estimated forfeiture rates that are derived from our historical forfeitures of similar awards.
| |
| (1) | The expected to vest options are the result of applying the pre-vesting forfeiture rate assumption to total outstanding options. The Company applies estimated forfeiture rates that are derived from our historical forfeitures of similar awards. |
The estimated fair value of each option granted is calculated using the Black-Scholes multiple option-pricing model. No options were granted during 2019. The average assumptions used in the model for the fiscal years ended December 30, 2018 and December 31, 2017 and December 25, 2016 were as follows:
| | | | 2018 | | 2017 | | 2016 | | 2019 | | 2018 | | 2017 |
| Risk-free interest rate | 2.5 |
| % | | 1.8 |
| % | | 1.2 |
| % | | — |
| % | | 2.5 |
| % | | 1.8 |
| % |
| Expected years until exercise | 3.2 |
| | 5.0 |
| | 4.5 |
| | 0 years |
| | 3.2 years |
| | 5.0 years |
| |
| Expected stock volatility | 43.4 |
| % | | 37.9 |
| % | | 39.0 |
| % | | — |
| % | | 43.4 |
| % | | 37.9 |
| % |
| Dividend yield | — |
| % | | — |
| % | | — |
| % | | — |
| % | | — |
| % | | — |
| % |
| Weighted average Black-Scholes fair value per share at date of grant | $ | 16.56 |
| | $ | 17.11 |
| | $ | 20.45 |
| | $ | — |
| | $ | 16.56 |
| | $ | 17.11 |
| |
| Total intrinsic value of options exercised (in thousands) | $ | 390 |
| | $ | 1,676 |
| | $ | 2,624 |
| | $ | 20 |
| | $ | 390 |
| | $ | 1,676 |
| |
The risk-free interest rate was based on the rate for zero coupon U.S. Government issues with a remaining term similar to the expected life. The expected life of the options represents the period of time the options are expected to be outstanding and is based on historical trends and team memberTeam Member exercise patterns. The expected stock price volatility represents an average of the Company’s historical volatility measured over a period approximating the expected life. The dividend yield assumption is based on the Company’s history and expectations of dividend payouts.
Time-Based RSUs
During 2019, 2018, 2017, and 2016,2017, the Company issued time-based restricted stock units (“RSUs”) to certain employees as permitted under the 2017 and 2007 Stock Plans. The Company can grant RSUs to its directors, executive officers and other key employees. The RSUs granted to employees typically vest in equal installments over four years. For the Company’s board of directors, RSUs vest in full on the earlier of the one-year anniversary date of the grant date.date or the next annual stockholder meeting. Upon vesting, one share of the Company’s common stock is issued for each RSU. The fair value of each RSU granted is equal to the market price of the Company’s stock at the date of grant.
The table below summarizes the status of the Company’s time-based RSUs under the 2017 and 2007 Stock Plans (shares in thousands):
| | | | | Restricted Stock Units | | Restricted Stock Units |
| | | Shares | | Weighted Average Grant-Date Fair Value (per share) | | Shares | | Weighted Average Grant-Date Fair Value (per share) |
| Outstanding, December 31, 2017 | | 102 |
| | $ | 57.51 |
| |
| Outstanding, December 30, 2018 | | | 119 |
| | $ | 53.13 |
|
| Awarded | | 80 |
| | 52.64 |
| | 211 |
| | 30.16 |
|
| Forfeited | | (24 | ) | | 55.09 |
| | (71 | ) | | 37.50 |
|
| Vested | | (39 | ) | | 62.51 |
| | (41 | ) | | 55.43 |
|
| Outstanding, December 30, 2018 | | 119 |
| | $ | 53.13 |
| |
| Outstanding, December 29, 2019 | | | 218 |
| | $ | 35.62 |
|
Performance Stock Units
During 2019, 2018, and 2017, the Company granted performance stock unit awards (“PSUs”) to certain employees as permitted under the 2017 Stock Plan. Each PSU represents the right to receive one share of the Company’s common stock on the payment date, subject to the achievement of the applicable performance goals at target and applicable vesting conditions. Each PSU is divided into three equal tranches with applicable performance periods, typically consisting of an annuala fiscal year. PSUs remain unvested until the last day of the third performance period and are forfeited in the event of termination of employment of a grantee prior to the last day of the third performance period.
The table below summarizes the status of the Company’s performance stock units under the 2017 Stock Plan (shares in thousands):thousands: | | | | | Performance Stock Units | | Performance Stock Units |
| | | Shares | | Weighted Average Grant-Date Fair Value (per share) | | Shares | | Weighted Average Grant-Date Fair Value (per share) |
| Outstanding, December 31, 2017 | | 30 |
| | $ | 48.87 |
| |
| Outstanding, December 30, 2018 | | | 63 |
| | $ | 55.35 |
|
| Awarded | | 38 |
| | 61.25 |
| | 141 |
| | 29.40 |
|
| Forfeited | | (5 | ) | | 61.25 |
| | (96 | ) | | 37.43 |
|
| Vested | | — |
| | — |
| | — |
| | — |
|
| Outstanding, December 30, 2018 | | 63 |
| | $ | 55.35 |
| |
| Outstanding, December 29, 2019 | | | 108 |
| | $ | 37.25 |
|
Long-Term Cash Incentive Plan
Beginning in 2017, the long-term cash incentive plan is based on operational metrics with three one-year performance periods. Prior to 2017, the long-term cash incentive plan was based on operational metrics with one three-year performance period. Compensation expense is recognized over the performance period based on the plan-to-date performance achievement. The awards cliff vest at the end of each three-year performance cycle. In 2019, 2018 and 2017, the Company recorded $0.2 million, $0.7 million and $0.4 million, respectively, in compensation expense related to the 2017 long-term cash incentive plan. In 2016, the Company reversed $2.3 million of its
No long-term cash incentive plan liability upon determining that certain performance metrics were not probable of being achieved.
In 2017, the Company paid out $0.7 million cash awards related to achievement of the performance metrics of the 2014 long-term cash incentive plan. In 2016, the Company paid out $3.4 million cash awards related to achievement of the performance metrics of the 2013 long-term cash incentive plan.payouts occurred during 2019 or 2018. At December 29, 2019 and December 30, 2018, and December 31, 2017, a $0.7$1.1 million and $0.4$0.7 million long-term cash incentive plan liability was included in Accrued payroll and payroll-related liabilities in the accompanying consolidated balance sheets.
16.15. Employee Benefit Programs
Employee Deferred Compensation Plan—In 2003, the
The Company adoptedoffers a deferred compensation plan that permits key employees and other members of management not eligible to participate indefined as highly compensated employees under the Employee Defined Contribution PlanIRS code to defer portions of their compensation.compensation in a pre-tax savings vehicle that allows for retirement savings above 401(k) limits. Under this plan, eligible Team Members may elect to defer up to
75% of their base salary and up to 100% of variable compensation and commissions each plan year. TheBeginning in 2019, the Company maydid not make matching contributions in an amount determined byunder the board of directors. In 2016,deferred compensation plan because the Company amended its 401(k) plan to allow a broader group, including highly compensated employees, to participate and receive matching contributions under the 401(k) plan. Prior to 2019, the board of directors authorized matching contributions equal to 50% of the first 4% of compensation that is deferred by the participant, an increase from the previous matching contributions equal to
25% of the first 4% of compensationwas deferred by the participant. The Company recognized an immaterial matching contribution expenseexpenses in 2018 and 2017 and 2016.related to the deferred compensation plan.
The assets of the deferred compensation plan are held in a rabbi trust, where they are invested in certain mutual funds that cover an investment spectrum ranging from equities to money market instruments and are available to satisfy the claims of the Company’s creditors in the event of bankruptcy or insolvency. These mutual funds have published market prices and are reported at fair value. See Note 9, Fair Value Measurements. Changes in the market value of the investments held in the trust result in the recognition of a corresponding gain or loss reported in Interest income and other, net in the consolidated statements of operations and comprehensive income (loss). A corresponding change in the liability associated with the deferred compensation plan results in an offsetting deferred compensation expense, or reduction of expense, reported in Selling, general, and administrative expenses in the consolidated statements of operations and comprehensive income (loss).
The Company recognized $1.1 million of deferred compensation expense in 2019, an immaterial amount of deferred compensation expense in 2018, and $1.0 million in 2017, and $0.6 million in 2016.2017. As of December 29, 2019 and December 30, 2018, $7.3 million and December 31, 2017, $8.2 million, and $9.3 millionrespectively, of deferred compensation asset is included in Other assets, net and $7.3 million and $8.2 million, and $9.3 millionrespectively, of deferred compensation plan liability is included in Other non-current liabilities in the accompanying consolidated balance sheets.
Employee Stock Purchase Plan—
In July 2017, the Company adopted the Amended and Restated Employee Stock Purchase Plan (the “New Plan”), which replaced the previous Employee Stock Purchase Plan (the “Prior Plan”). The New Plan authorized 100,000 shares of the Company’s common stock for issuance. Under the New Plan, eligible Team Members may voluntarily contribute up to 15% of their salary, subject to limitations, to purchase common stock at a price equal to 85% of the fair market value of a share of the Company’s common stock on the first day of each offering period or 85% of the fair market value of a share of the Company’s common stock on the last day of each offering period, whichever amount is less. In general, all of the Company’s officers and Team Members who have been employed by the Company for at least one year and who are regularly scheduled to work more than 20 hours per week are eligible to participate in this plan which operates in successive six month periods commencing on each January 1 and July 1 of each fiscal year. During 2017,2019, the Company issued 17,294 shares under the Prior Plan. In 2017 the Company had issued a total of 7,60729,582 shares under the New Plan.Plan with 52,451 shares available for future issuance. During 2018, the Company has issued a total of 10,360 shares under the New Plan, and a total of 82,033 shares remain available for future issuance.Plan.
For 2018,2019, in accordance with the guidance for accounting for stock compensation, the Company estimated the fair value of the awards granted pursuant to the stock purchase plan using the Black-Scholes multiple-option pricing model. The average assumptions used in the model included 1.51% risk-free interest rate, 0.5 year expected life, expected volatility of 41.82%, and 0% dividend yield. The weighted average fair value per share at grant date was $7.56. For 2018, the average assumptions used in the model included 2.05% risk-free interest rate, 0.5 year expected life, expected volatility of 39.92%, and 0% dividend yield. The weighted average fair value per share at grant date was $5.19. For 2017, the average assumptions used in the model included 1.05% risk-free interest rate, 0.5 year expected life, expected volatility of 37.96%, and 0% dividend yield. The weighted average fair value per share at grant date was $11.16. The Company recognized $0.1$0.2 million of compensation expense related to this plan in fiscal year 2019, $0.1 million in fiscal year 2018, and $0.2 million in fiscal years 2017 and 2016.year 2017.
Employee Defined Contribution Plan—
The Company maintains a 401(k) Savings Plan (“401K Plan”) which covers eligible Team Members who have satisfied the service requirements and reached 21 years of age. The 401K Plan, which qualifies under Section 401(k) of the Internal Revenue Code, allows Team Members to defer specified percentages of their compensation on a pre-tax basis. The Company may make matching contributions in an amount determined by the board of directors. In addition, the Company may contribute each period, at its discretion, an additional amount from profits. In 2016,2019, the board of directors authorized an increase to employer matching contributions equal to 100% of the first 3% of compensation and 50% on the next 2% of compensation. The Company matches contributions when the employee contribution is made, and the employer matching contributions are not subject to a vesting schedule. Prior to 2019, the Company matched employee contributions equal to 50% of the first 4% of compensation that iswas deferred by the participant an increase fromconsistent with the Company’s previous matching contributions equal to 25% of the first 4% of compensation deferred by the participant.Company's vesting schedule. The Company recognized matching contribution expense of $3.0 million in 2019, $0.9 million in 2018, and $0.7 million in 2017, and $0.6 million in 2016.2017.
17.16. Quarterly Results of Operations (unaudited)
The following tables summarize the unaudited consolidated quarterly financial information for fiscal years 20182019 and 20172018 (in thousands, except per share data):
|
| | | | | | | | | | | | | | | | | | | | |
| 2019 | | Q1
(16 weeks) | | Q2
(12 weeks) | | Q3
(12 weeks) | | Q4
(12 weeks) | | 2019
(52 weeks) |
| Total revenues | | $ | 409,866 |
| | $ | 307,981 |
| | $ | 294,222 |
| | $ | 302,945 |
| | $ | 1,315,014 |
|
| Income (loss) from operations | | $ | 3,401 |
| | $ | (12,852 | ) | | $ | (5,223 | ) | | $ | 1,547 |
| | $ | (13,127 | ) |
| Net income (loss) | | $ | 639 |
| | $ | 981 |
| | $ | (1,821 | ) | | $ | (7,702 | ) | | $ | (7,903 | ) |
| Basic earnings (loss) per share | | $ | 0.05 |
| | $ | 0.08 |
| | $ | (0.14 | ) | | $ | (0.60 | ) | | $ | (0.61 | ) |
| Diluted earnings (loss) per share | | $ | 0.05 |
| | $ | 0.08 |
| | $ | (0.14 | ) | | $ | (0.60 | ) | | $ | (0.61 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| 2018 | | Q1
(16 weeks) | | Q2
(12 weeks) | | Q3
(12 weeks) | | Q4
(12 weeks) | | 2018
(52 weeks) |
| Total revenues | | $ | 421,519 |
| | $ | 315,388 |
| | $ | 294,877 |
| | $ | 306,779 |
| | $ | 1,338,563 |
|
| Income (loss) from operations | | $ | 7,019 |
| | $ | (4,214 | ) | | $ | 1,805 |
| | $ | (15,095 | ) | | $ | (10,485 | ) |
| Net income (loss) | | $ | 4,380 |
| | $ | (1,874 | ) | | $ | 1,709 |
| | $ | (10,634 | ) | | $ | (6,419 | ) |
| Basic earnings (loss) per share | | $ | 0.34 |
| | $ | (0.14 | ) | | $ | 0.13 |
| | $ | (0.82 | ) | | $ | (0.49 | ) |
| Diluted earnings (loss) per share | | $ | 0.34 |
| | $ | (0.14 | ) | | $ | 0.13 |
| | $ | (0.82 | ) | | $ | (0.49 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| 2017 | | Q1
(16 weeks) | | Q2
(12 weeks) | | Q3
(12 weeks) | | Q4
(13 weeks) | | 2017 (53 weeks) |
| Total revenues | | $ | 420,629 |
| | $ | 317,310 |
| | $ | 305,700 |
| | $ | 343,927 |
| | $ | 1,387,566 |
|
| Income from operations | | $ | 17,458 |
| | $ | 9,366 |
| | $ | 4,056 |
| | $ | 8,152 |
| | $ | 39,032 |
|
| Net income | | $ | 11,567 |
| | $ | 6,931 |
| | $ | 2,714 |
| | $ | 8,807 |
| | $ | 30,019 |
|
| Basic earnings per share | | $ | 0.90 |
| | $ | 0.54 |
| | $ | 0.21 |
| | $ | 0.68 |
| | $ | 2.33 |
|
| Diluted earnings per share | | $ | 0.89 |
| | $ | 0.53 |
| | $ | 0.21 |
| | $ | 0.68 |
| | $ | 2.31 |
|
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of such period, are effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act are:
Recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and
Accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act. Those rules define internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the company’s assets that could have a material effect on the financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 30, 2018.29, 2019. In making this assessment, the Company’s management used the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our assessment and those criteria, management believes that, as of December 30, 2018,29, 2019, the Company’s internal control over financial reporting is effective.
KPMG, an independent registered public accounting firm, has issued an attestation report on the Company’s internal control over financial reporting included herein.
Inherent Limitations of Internal Controls
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met and misstatements are prevented or detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheReport of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Red Robin Gourmet Burgers, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Red Robin Gourmet Burgers, Inc.’s and subsidiaries’subsidiaries' (the Company) internal control over financial reporting as of December 30, 2018,29, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2018,29, 2019, based on criteria established inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 30, 201829, 2019 and December 31, 2017,30, 2018, the related consolidated statements of operations and comprehensive (loss) income, (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 30, 2018,29, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2019,25, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Form 10-K.Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Denver, Colorado
February 26, 201925, 2020
ITEM 9B. Other Information
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Our board of directors has adopted codes of ethics that apply to all of our directors, officers, and employees, including our chief executive officer, chief financial officer, and all of the finance team. The full text of our codes of ethics can be found on the investor relations page of our website at www.redrobin.com. We intend to disclose any changes in or waivers from the codes of ethics by posting such information on our corporate website or by filing a Current Report on Form 8-K.
Information relating to this item will be included in an amendment to this report or in the proxy statement for our 20192020 annual stockholders’ meeting and is incorporated by reference in this report. Certain information concerning our executive officers is included in Item 1 of Part I of this report and is hereby incorporated by reference.
ITEM 11. Executive Compensation
Information relating to this item will be included in an amendment to this report or in the proxy statement for our 20192020 annual stockholders’ meeting and is hereby incorporated by reference in this report.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information relating to this item will be included in an amendment to this report or in the proxy statement for our 20192020 annual stockholders’ meeting and is hereby incorporated by reference in this report.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Information relating to this item will be included in an amendment to this report or in the proxy statement for our 20192020 annual stockholders’ meeting and is hereby incorporated by reference in this report.
ITEM 14. Principal Accounting Fees and Services
Information relating to this item will be included in an amendment to this report or in the proxy statement for our 20192020 annual stockholders’ meeting and is hereby incorporated by reference in this report.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
| |
| (a) | Exhibits and Financial Statement Schedules |
| |
| (1) | Our Consolidated Financial Statements and Notes thereto are included in Item 8 of this Annual Report on Form 10-K. See “Financial Statements and Supplementary Data-Red Robin Gourmet Burgers, Inc. - Index” for more detail. |
| |
| (2) | All financial schedules have been omitted either because they are not applicable or because the required information is provided in our Consolidated Financial Statements and Notes thereto, included in Item 8 of this Annual Report on Form 10-K. |
|
| | |
Exhibit Number | | Description |
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| | | |
| | |
| | | |
| | |
| | |
|
| | |
Exhibit Number | | Description |
| | |
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| | The following financial information from the Annual Report on Form 10-K of Red Robin Gourmet Burgers, Inc. for the year ended December 30, 2018,29, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 30, 201829, 2019 and December 31, 2017;30, 2018; (ii) Consolidated Statements of Operations for the years ended December 29, 2019, December 30, 2018, and December 31, 2017, and December 25, 2016;2017; (iii) Consolidated Statements of Stockholders’ Equity for the years ended December 29, 2019, December 30, 2018, and December 31, 2017, and December 25, 2016;2017; (iv) Consolidated Statements of Cash Flows for the years ended December 29, 2019, December 30, 2018, and December 31, 2017, and December 26, 2016;2017; and (v) the Notes to Consolidated Financial Statements. |
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| ( ) | Exhibits previously filed in the Company’s periodic filings as specifically noted. |
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| * | Executive compensation plans and arrangements. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | RED ROBIN GOURMET BURGERS, INC. (Registrant) |
February 26, 201925, 2020 | | By: | | /s/ DENNY MARIE POSTPAUL MURPHY |
| (Date) | | | | Denny Marie PostPaul Murphy
(Chief Executive Officer) |
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signature | | Title | | Date |
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/s/ DENNY MARIE POSTPAUL MURPHY | | President and Chief Executive Officer (Principal Executive Officer and Director) | | February 26, 201925, 2020 |
Denny Marie PostPaul Murphy | | |
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| /s/ LYNN S. SCHWEINFURTH | | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | February 26, 201925, 2020 |
| Lynn S. Schweinfurth | | |
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/s/ DAVE HANSENDAVID A. PACE | | Chief Accounting Officer (Principal Accounting Officer)Chairperson of the Board | | February 26, 201925, 2020 |
Dave HansenDavid A. Pace | | |
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/s/ PATTYE L. MOORETOM CONFORTI | | Chairperson of the BoardDirector | | February 26, 201925, 2020 |
Pattye L. MooreTom Conforti | | |
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| /s/ CAMMIE W. DUNAWAY | | Director | | February 26, 201925, 2020 |
| Cammie W. Dunaway | | |
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| /s/ G.J. HART | | Director | | February 25, 2020 |
| G.J. Hart | | |
| | | | |
| /s/ KALEN F. HOLMES | | Director | | February 25, 2020 |
| Kalen F. Holmes | | |
| | | | | |
| /s/ GLENN B. KAUFMAN | | Director | | February 26, 201925, 2020 |
| Glenn B. Kaufman | | |
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/s/ AYLWIN B. LEWISSTEVEN K. LUMPKIN | | Director | | February 26, 201925, 2020 |
Aylwin B. LewisSteven K. Lumpkin | | |
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| /s/ STUART I. ORAN | | Director | | February 26, 201925, 2020 |
| Stuart I. Oran | | |
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/s/ KALEN F. HOLMESALLISON PAGE | | Director | | February 26, 201925, 2020 |
Kalen F. Holmes | | |
| | | | |
/s/ STEVEN K. LUMPKIN | | Director | | February 26, 2019 |
Steven K. LumpkinAllison Page | | |
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