RED ROBIN GOURMET BURGERS, INC. 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 2021 and 2020 refer to the fifty-two weeks endedDecember 26, 2021 andDecember 27, 2020 , unless otherwise indicated. Overview Description of BusinessRed Robin Gourmet Burgers, Inc. , aDelaware corporation, together with its subsidiaries ("Red Robin ," "we," "us," "our" or the "Company"), primarily operates, franchises, and develops casual dining restaurants with 531 locations inNorth America . As ofDecember 26, 2021 , the Company operated 430 Company-owned restaurants located in 38 states. The Company also had 101 franchised restaurants in 16 states and one Canadian province as ofDecember 26, 2021 . 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's fiscal year ends on the last Sunday of each calendar year. Most of our fiscal years have 52 weeks; however, we experience a 53rd week once every five to six years. Both 2021 and 2020 refer to 52 week fiscal years.
Fiscal Year 2021 Accomplishments
Despite the continued challenges of the COVID-19 pandemic, and associated staffing and supply chain headwinds, we made significant progress on executing our strategic business model during fiscal year 2021. Our accomplishments in 2021 include the following: •Sustained off-premises sales of more than double pre-pandemic levels, with off-premises sales mix of 31.4% for the fourth quarter of 2021, compared to approximately 14.0% in the fourth quarter of 2019. Off-premises sales comprised$84.7 million ,$85.1 million and$36.7 million of comparable restaurant revenue for the fourth quarters of 2021, 2020 and 2019, respectively; •Continued Donatos® roll-out to 120 Company-owned restaurants, bringing the total number of restaurants with Donatos® to 198 restaurants as ofDecember 26, 2021 . Restaurants that have been serving Donatos® pizza prior to 2021 are continuing to benefit from growing incremental sales beyond their first year as operations mature and brand affinity grows, with comparable restaurant revenue up 6.5% compared to 2019 in restaurants without supply chain issues;
•At the end of 2021, we were 93% staffed at the salaried manager positions, and 96% staffed in the General Manager role;
•Launched integrated and seamless digital ecosystem for our Guests, including mobile applications on both iOS and Android platforms, an improved and more relevant digital Guest experience consisting of a new and improved website, and the integration of a new loyalty program; and,
•Completed our lease renegotiation and restructuring initiative that we began in 2020 as a result of the COVID-19 pandemic, resulting in 3% to 4% occupancy savings over remaining lease terms on restructured leases.
COVID-19 Impact
The COVID-19 pandemic continues to create unprecedented challenges for our
industry including government mandated restrictions, changing consumer behavior,
labor and supply chain challenges, and wide spread inflationary costs. Even as
government restrictions were lifted, and dining rooms returned to full capacity,
the surge in the Delta and Omicron variants continued to highlight the critical
importance of providing a safe environment for our Team Members and Guests.
In response to these COVID-19 challenges, the Company limited dining hours and
seating capacity in order to preserve the consistent quality experience our
Guests expect from us. Our disciplined Guest focus is delivered through our TGX
hospitality model, off-premises enhancements, and our management labor model.
Our ability to attract and retain Team Members has become more challenging in
the current competitive job market. Staffing is our number one priority; we have
supported our staffing efforts through technology enhancements to the
application and hiring process, improving our wage policies, holding national
hiring days, and deploying internal and external resources to augment
recruiting, hiring, and training efforts. The challenges in hiring and retention
and global supply chain disruptions have affected many of our vendor partners,
resulting in intermittent product and distribution shortages.
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We remain focused on proactively addressing these industry challenges, while delivering a great Guest experience and continuing to prioritize the satisfaction and retention of our Team Members.
Financial and Operational Highlights
The following summarizes the financial and operational highlights during the
fifty-two weeks ended
Restaurant revenue, compared to the same period in the prior year, is presented in the table below:
(millions)
Restaurant revenue for the fifty-two weeks ended
854.1
Increase in comparable(1) restaurant revenue
276.6
Increase in non-comparable restaurant revenue
7.0
Total increase
283.6
Restaurant revenue for the fifty-two weeks ended
(1) Comparable restaurant revenue represents revenue from Company-owned restaurants that have operated five full quarters as of the end of the period presented.
Restaurant revenues and operating costs as a percentage of restaurant revenue for the period are detailed in the table below:
Fifty-two weeks ended 2021 compared to 2020
(Dollars in millions) December 26, 2021 December 27, 2020 Increase/(Decrease)
Restaurant revenue $ 1,137.7 $ 854.1 33.2 %
Restaurant operating costs: (Percentage of Restaurant Revenue) (Basis Points)
Cost of sales 22.9 % 23.2 % (30)
Labor 36.0 39.0 (300)
Other operating 18.3 19.3 (100)
Occupancy 8.5 11.7 (320)
Total 85.7 % 93.2 % (750)
28-------------------------------------------------------------------------------- Table of Contents The following table summarizes Net loss, loss per diluted share, and adjusted loss per diluted share (a non-GAAP measure) for the fifty-two weeks endedDecember 26, 2021 andDecember 27, 2020 ;
Fifty-two Weeks Ended
December 26, December 27,
(Dollars and shares in thousands, except per share amounts) 2021 2020
Net loss as reported $ (50,002) $ (276,068)
Loss per share - diluted:
Net loss as reported $ (3.19) $ (19.29)
Restaurant closure costs 0.40 1.39
Asset impairment 0.45 1.88
Litigation contingencies 0.08 0.45
COVID-19 related costs 0.08 0.13
Board and stockholder matter costs 0.01 0.17
Goodwill impairment - 6.67
Severance costs - 0.06
Income tax effect (0.26) (2.79)
Adjusted loss per share - diluted Weighted average shares outstanding Basic 15,660 14,314 Diluted 15,660 14,314 We believe the non-GAAP measure of adjusted loss per diluted 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. Adjusted loss per diluted share excludes the effects of goodwill impairment, asset impairment, litigation contingencies, board and stockholder matters costs, restaurant closure costs, severance and executive transition costs, executive retention costs, COVID-19 related costs, and related income tax effects. Other companies may define adjusted net loss per share differently, and as a result our measure of adjusted loss per share may not be directly comparable to those of other companies. Adjusted loss per share should be considered in addition to, and not as a substitute for, net loss as reported in accordance withU.S. GAAP as a measure of performance.
Restaurant Data
The following table details restaurant unit data for our Company-owned and franchised locations for the periods indicated:
Fifty-two Weeks Ended
December 26, 2021 December 27, 2020
Company-owned:
Beginning of period 443 454
Opened during the period 1 -
Closed during the period (14) (11)
End of period 430 443
Franchised:
Beginning of period 103 102
Opened during the period - 1
Closed during the period (2) -
End of period 101 103
Total number of restaurants 531 546
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The following table presents total Company-owned and franchised restaurants by
state or province as of
Company-Owned Restaurants Franchised Restaurants
State:
Arkansas 2 2
Alaska - 3
Alabama 4 -
Arizona 17 1
California 59 -
Colorado 22 -
Connecticut - 3
Delaware - 5
Florida 19 -
Georgia 6 -
Iowa 5 -
Idaho 8 -
Illinois 22 -
Indiana 13 -
Kansas - 4
Kentucky 4 -
Louisiana 2 -
Massachusetts 4 2
Maryland 13 -
Maine 2 -
Michigan - 20
Minnesota 4 -
Missouri 8 3
Montana - 2
North Carolina 17 -
Nebraska 4 -
New Hampshire 3 -
New Jersey 12 1
New Mexico 3 -
Nevada 6 -
New York 14 -
Ohio 18 2
Oklahoma 5 -
Oregon 15 5
Pennsylvania 11 21
Rhode Island 1 -
South Carolina 4 -
South Dakota 1 -
Tennessee 11 -
Texas 20 9
Utah 1 6
Virginia 20 -
Washington 39 -
Wisconsin 11 -
Province:
British Columbia - 12
Total 430 101
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Results of Operations
Operating results for each fiscal period presented below are expressed as a
percentage of total revenues, except for the components of restaurant operating
costs, which are expressed as a percentage of restaurant revenue. Certain
percentage amounts in the table below do not total due to rounding as well as
restaurant operating costs being expressed as a percentage of restaurant revenue
and not total revenues.
Year Ended
2021 2020
Revenues:
Restaurant revenue 97.9 % 98.3 %
Franchise revenue 1.5 1.0
Other revenue 0.6 0.7
Total revenues 100.0 % 100.0 %
Costs and expenses:
Restaurant operating costs(1) (exclusive of depreciation and
amortization shown separately below):
Cost of sales 22.9 % 23.2 %
Labor 36.0 39.0
Other operating 18.3 19.3
Occupancy 8.5 11.7
Total restaurant operating costs 85.7 93.2
Depreciation and amortization 7.2 10.1
Selling, general and administrative expenses 10.6 12.3
Pre-opening and acquisition costs 0.1 -
Other charges 1.4 17.7
Loss from operations (3.2) % (31.7) %
Other expense (income):
Interest expense 1.2 % 1.2 %
Interest (income) and other, net (0.1) (0.2)
Total other expenses 1.2 1.0
Loss before income taxes (4.3) (32.6)
Income tax benefit 0.0 (0.9)
Net loss (4.3) % (31.8) %
-------------------(1) Expressed as a percentage of restaurant revenue
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Revenues
Year Ended
(Revenues in thousands) 2021
2020 Percent Change
Restaurant revenue $ 1,137,733 $ 854,136 33.2 %
Franchise revenue 17,236 8,853 94.7 %
Other revenue 7,109 5,726 24.2 %
Total revenues $ 1,162,078 $ 868,715 33.8 %
Average weekly net sales per Company-owned
restaurants $ 51,116 $ 38,381
Total operating weeks 22,258 22,254 - %
Net sales per square foot $ 425 $ 320 32.8 %
Restaurant revenue, which comprises primarily food and beverage sales, increased
$283.6 million in 2021, or 33.2%, as compared to 2020. The increase was due to a
$276.6 million , or 33.5%, increase in comparable restaurant revenue due to the
COVID-19 pandemic and a $7.0 million increase primarily from reopened
restaurants that were temporarily closed during 2020. The comparable restaurant
revenue increase was driven by a 22.3% increase in Guest count and an 11.2%
increase in average Guest check. The increase in average Guest check comprised a
6.7% increase in menu mix, and a 3.7% increase in pricing and a 0.8% increase
from lower discounting. The increase in menu mix was primarily driven by higher
sales of beverages, appetizers, and limited time menu offerings with higher
dine-in sales volumes.
Average weekly net sales volumes represent the total restaurant revenue for all
Company-owned Red Robin restaurants for each time period presented, divided by
the number of operating weeks in the period. Comparable restaurant revenues
include those restaurants that are in the comparable base based on operating
five full fiscal quarters as of the end of each period presented. Temporarily
closed Company-owned restaurants due to the COVID-19 pandemic were not included
in the comparable base for the fiscal years ended December 26, 2021 and December
27, 2020 . 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, the
average square footage of our restaurants, as well as the impact of changing
capacity limitations in response to COVID-19 levels in a given locality. Net
sales per square foot represents the total of restaurant revenue for
Company-owned restaurants included in the comparable base divided by the total
adjusted square feet of Company-owned restaurants included in the comparable
base.
Franchise revenue primarily comprises royalty income and advertising fund
contributions. Franchise revenue increased $8.4 million , or 94.7%, in 2021
compared to 2020 primarily due to improved comparable franchise sales
performance, and charging and collecting royalty payments and advertising
contributions from our franchisees during 2021. During 2020, the Company had
temporarily abated franchisee royalty and advertising contribution payments in
mid-March, and resumed collection during the latter half of the second fiscal
quarter of 2020.
Other revenue is primarily comprised of gift card breakage, which represents the
value associated with the portion of gift cards sold that are unlikely to be
redeemed, and licensing royalties. During 2021 and 2020, we recognized $5.4
million and $4.5 million of gift card breakage.
Cost of Sales
(In thousands, except percentages) 2021 2020 Percent Change Cost of sales$ 260,896 $ 198,487 31.4 % As a percent of restaurant revenue 22.9 % 23.2 %
(0.3) %
Cost of sales, which comprises food and beverage costs, is variable and
generally fluctuates with sales channel mix and volume. Cost of sales as a
percentage of restaurant revenue decreased 30 basis points in 2021 as compared
to 2020. The decrease was primarily driven by pricing and favorable mix shifts,
partially offset by commodity inflation.
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Labor
(In thousands, except percentages) 2021 2020 Percent Change Labor$ 409,901 $ 332,827 23.2 % As a percent of restaurant revenue 36.0 % 39.0 %
(3.0) %
Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits. Labor as a percentage of restaurant revenue decreased 300 basis points in 2021 as compared to 2020. The decrease was primarily driven by staffing shortages, and sales leverage, partially offset by higher wage rates, staffing costs and increased restaurant management compensation costs in 2021.
Other Operating
(In thousands, except percentages) 2021 2020 Percent Change Other operating$ 207,829 $ 164,468 26.4 % As a percent of restaurant revenue 18.3 % 19.3 %
(1.0) %
Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs including royalties paid to Donatos®. Other operating costs as a percentage of restaurant revenue decreased 100 basis points in 2021 as compared to 2020. The decrease was primarily driven by sales leverage and lower utilities and supplies, partially offset by increased third party commissions and hiring advertisement costs.
Occupancy
(In thousands, except percentages) 2021 2020 Percent Change Occupancy$ 96,484 $ 99,521 (3.1) % As a percent of restaurant revenue 8.5 % 11.7 %
(3.2) %
Occupancy costs include fixed rents, property taxes, common area maintenance charges, general liability insurance, contingent rents, and other property costs. In 2021, occupancy costs as a percentage of restaurant revenue decreased 320 basis points as compared to 2020 primarily driven by sales leverage, savings from permanently closed restaurants and restructured leases. Our fixed rents in 2021 and 2020 were$68.8 million and$66.1 million , an increase of$2.7 million due to the recognition of occupancy costs in Other charges for temporarily closed Company-owned restaurants during periods of closure due to the COVID-19 pandemic in 2020, partially offset by decreases from 14 restaurants permanently closed during 2021 and 11 restaurants permanently closed during 2020. Depreciation and Amortization (In thousands, except percentages) 2021 2020 Percent Change Depreciation and amortization$ 83,438 $ 87,557 (4.7) % As a percent of total revenues 7.2 % 10.1 %
(2.9) %
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 2021, depreciation and amortization expense as a percentage of revenue decreased 290 basis points as compared to 2020. The decreases are primarily due to net closed Company-owned restaurants, and sales leverage.
Selling, General, and Administrative expenses
(In thousands, except percentages) 2021 2020
Percent Change
Selling, general, and administrative expenses
14.9 %
As a percent of total revenues 10.6 % 12.3 % (1.7) %
Selling, general, and administrative costs include all corporate and administrative functions. Components of this category include marketing and advertising costs, our restaurant support center, regional, and franchise support salaries and benefits; travel; professional and consulting fees; corporate information systems; legal expenses; office rent; training; and board of directors expenses.
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Selling, general, and administrative expense increased$15.9 million , or 14.9% in 2021 as compared to 2020. The increase in selling, general, and administrative expenses in 2021 was primarily driven by the return of marketing spend closer to a more normalized level in 2021, merit increases and lapping temporary salary reductions in 2020, increased travel costs, and higher professional services spend.
Pre-opening Costs
(In thousands, except percentages) 2021 2020 Percent Change Pre-opening costs$ 1,410 $ 296 * As a percent of total revenues 0.1 % * *
* Percentage increases and decreases over 100 percent were not considered meaningful.
Pre-opening costs, which are expensed as incurred, comprise the costs related to preparing restaurants to introduce Donatos® and other initiatives, as well as direct costs, including labor, occupancy, training, and marketing, incurred related to opening new restaurants and hiring the initial work force. Our pre-opening costs fluctuate from period to period, depending upon, but not limited to, the number of restaurant openings, the size of the restaurants being opened, and the location of the restaurants. Pre-opening costs for any given quarter will typically include expenses associated with restaurants opened during the quarter as well as expenses related to restaurants opening in subsequent quarters. We incurred pre-opening costs during 2021 related to the rollout of Donatos® and the costs associated with opening one new restaurant. We incurred pre-opening costs during 2020 related to the rollout of Donatos®. The Company completed the rollout of 120 restaurants during the year endedDecember 26, 2021 , and expects to continue its roll out of Donatos® to approximately 50 restaurants in 2022 with full completion by 2024. Rollout of Donatos® requires pre-opening expense of approximately$12 thousand per restaurant.
Other Charges
(In thousands, except percentages) 2021 2020 Percent Change Restaurant closures and refranchising costs$ 6,276 $ 19,846 (68.4) % Asset impairment 7,052 26,940 (73.8) % Litigation contingencies 1,330 6,440 (79.3) % COVID-19 related costs 1,288 1,858 (30.7) % Board and shareholder matter costs 128 2,504 (94.9) % Goodwill impairment - 95,414 * Severance and executive transition - 881 * Other charges$ 16,074 $ 153,883
* Percentage increases and decreases over 100 percent were not considered meaningful.
For further information on Other charges line items, refer to Footnote 4, Other Charges, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Interest Expense and Interest Income
Interest expense in 2021 and 2020 was
During the fourth quarter of 2020, we received a$49.4 million federal cash tax refund that included approximately$1.1 million of interest, recorded in the Interest income and other, net line on the consolidated statements of operation and comprehensive loss. Income Taxes Income tax benefit was$0.2 million in 2021, compared to an income tax benefit of$7.5 million in 2020. Our effective tax rate was a 0.3% benefit in 2021 and a 2.6% benefit in 2020. The decrease in tax benefit for the year endedDecember 26, 2021 is primarily due to the 2020 favorable rate impact of net operating loss ("NOL") carrybacks allowed as part of the CARES Act. The Company had outstanding federal and state refund claims of approximately$15.8 million as ofDecember 26, 2021 . InJanuary 2022 , the Company received$2.4 million of those refund claims and expects to receive the remaining$13.4 million over the next 12-18 months due to processing delays at theIRS . 34
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Liquidity and Capital Resources
Cash and cash equivalents increased$6.7 million to$22.8 million atDecember 26, 2021 , from$16.1 million at the beginning of the fiscal year. As the Company continues to recover from the COVID-19 pandemic and generates operating cash flow, the Company is using available cash flow from operations to pay down debt, maintain existing restaurants and infrastructure, and execute on its long-term strategic initiatives. As ofDecember 26, 2021 , the Company had approximately$57.7 million in liquidity, including cash on hand and available borrowing capacity under its credit facility.
Cash Flows
The table below summarizes our cash flows from operating, investing, and financing activities for each fiscal year presented (in thousands):
Year Ended
2021 2020
Net cash provided by operating activities$ 47,292 $
20,233
Net cash used in investing activities (42,241)
(21,393)
Net cash provided by (used) in financing activities 1,563 (11,704) Effect of currency translation on cash
20 (1,065)
Net increase (decrease) in cash and cash equivalents
Operating Cash Flows Net cash flows provided by operating activities increased$27.1 million to$47.3 million in 2021 as compared to 2020. The changes in net cash provided by operating activities are primarily attributable to a$163.4 million increase in profit from operations (defined as the change in operating margins from comparable and non-comparable restaurants), lower accounts receivable and higher accounts payable balances due to the timing of operational receipts and payments, as well as other changes in working capital as presented in the Consolidated Statements of Cash Flows.
Investing Cash Flows
Net cash flows used in investing activities increased$20.8 million to$42.2 million in 2021 as compared to 2020. The increase is primarily due to adding Donatos® to 120 restaurants during 2021, as well as increased spending on restaurant improvements, and investments in technology.
The following table lists the components of our capital expenditures for each fiscal year presented (in thousands):
Year Ended
2021 2020
Donatos® expansion $ 17,113 $ 2,620
Restaurant improvement capital and other 12,798
9,794
Investment in technology, infrastructure, and other 10,812 9,718 New restaurants and restaurant refreshes
1,538 -
Total capital expenditures $ 42,261 $ 22,132
Expenditures for Donatos® expansion include expenditures for kitchen equipment,
other equipment and other capital costs associated with adding Donatos® to our
restaurants, Restaurant improvement capital and other consists of capital
equipment for our restaurants, Investment in technology, infrastructure and
other consists of capital costs related to restaurant technology assets, capital
overhead, and other items, and new restaurants and restaurant refreshes
primarily relates to costs associated with the re-establishment of our new
restaurant development program.
Financing Cash Flows
Net cash flows provided by (used in) financing activities increased$13.3 million to$1.6 million in 2021 as compared to 2020. The increase primarily resulted from a$40.2 million increase in net draws of long-term debt, a decrease of$1.6 million for cash used to repurchase the Company's common stock due to the Company's financial covenants restricting the repurchase of common stock in 2021, and a$1.2 million decrease in cash paid for debt issuance costs in 2021 compared to 2020, partially offset by a$28.7 million decrease from net cash proceeds received from the issuance of common stock in 2020. 35
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Prior Credit Facility
OnNovember 9, 2021 , the Company entered into the Third Amendment to the Company's amended and restated credit facility (the "prior credit facility") to obtain additional flexibility to continue to implement our business strategy. The Third Amendment, which waived compliance with the Leverage Ratio Covenant for the third fiscal quarter of 2021, and provided for adjustments during fourth fiscal quarter of 2021, also included certain amendments to the prior credit facility to address LIBOR transition matters. As ofDecember 26, 2021 , the Company had outstanding borrowings under the prior credit facility of$176.1 million , of which$9.7 million was classified as current, in addition to amounts issued under letters of credit of$7.9 million . Amounts issued under letters of credit reduce the amount available under the credit facility but are not recorded as debt.
As of
For additional details regarding our prior credit facility, see Footnote 8, Borrowings included within the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
New Credit Facility
OnMarch 4, 2022 the Company entered into a new Senior Secured Term Loan and Revolving Credit Facility (the "new credit facility"). The new facility references the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements and backed byU.S. Treasury securities, or the Alternate Base Rate ("ABR"), which represents the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% per annum, or (c) one-month term SOFR plus 1.00% per annum. We are subject to a number of customary covenants under our new credit facility, including limitations on additional borrowings, acquisitions, stock repurchases, sales of assets, and dividend payments, as well as a Total Net Leverage ratio covenant.
For additional details regarding our new credit facility, see Footnote 8, Borrowings included within the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Debt Outstanding
Total debt outstanding increased$6.3 million to$177.0 million atDecember 26, 2021 , from$170.6 million atDecember 27, 2020 , due to net borrowings of$6.3 million on the credit facility during 2021. As ofDecember 26, 2021 , the Company had$35 million of available borrowing capacity under its credit facility. Net borrowings during 2021 totaled$6.3 million .
Share Repurchase
OnAugust 9, 2018 , the Company's board of directors authorized the Company's current share repurchase program of up to a total of$75 million of the Company's common stock. The share repurchase authorization will terminate upon completing repurchases of$75 million of common stock unless otherwise terminated by the board. Pursuant to the repurchase program, purchases may be made from time to time at the Company's discretion and the Company is not obligated to acquire any particular amount of common stock. From the date of the current program approval throughDecember 26, 2021 , we have repurchased a total of 226,500 shares at an average price of$29.14 per share for an aggregate amount of$6.6 million . Accordingly, as ofDecember 26, 2021 , we had$68.4 million of availability under the current share repurchase program. EffectiveMarch 14, 2020 , the Company temporarily suspended its share repurchase program to provide additional liquidity during the COVID-19 pandemic. As ofDecember 26 . 2021, our ability to repurchase shares was limited to conditions set forth by our lenders in the Second Amendment to our credit facility prohibiting us from repurchasing additional shares until the first fiscal quarter of 2022 at the earliest and not until we deliver a covenant compliance certificate demonstrating a lease adjusted leverage ratio less than or equal to 5.00:1.00. The new credit facility limits our ability to repurchase shares to certain conditions set forth by our lenders in the new credit facility. 36
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Contractual Obligations
The following table summarizes the amounts of payments due under specified
contractual obligations as of
Payments Due by Period
Total 2022 2023 - 2024 2025 - 2026 Thereafter
Long-term debt obligations(1) $ 189,692 $
21,796
15,021 1,716 2,508 2,628 8,169
Operating lease obligations(3) 681,318 80,361 151,524 134,435 314,998
Purchase obligations(4) 233,491 81,830 82,693 45,373 23,595
Other non-current liabilities(5) 6,244 1,408 1,833 147 2,856
Total contractual obligations $ 1,125,766 $
187,111
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(1) Long-term debt obligations primarily represent minimum required principal payments under our existing credit agreement as ofDecember 26, 2021 , including estimated interest of$12.4 million based on a 7% average borrowing interest rate.
(2) Finance lease obligations include interest of
(3) Operating lease obligations exclude variable lease costs, such as sales
based contingent rent, and include interest of
(4) Purchase obligations includes the Company's share of expected system-wide fixed price commitments for food, beverage, and restaurant supply items. These amounts are estimates based on anticipated inventory needed for the Company's restaurants, and could vary due to the timing of volumes. (5) Other non-current liabilities primarily represent the employee deferred compensation plan liability. Refer to Note 15, Employee Benefit Programs, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.
Financial Condition and Future Liquidity
We require capital principally to maintain, improve, and refurbish existing restaurants, support infrastructure needs, and for general operating purposes, as well as to grow the business through new restaurant construction and expansion of our restaurant base which serves Donatos®. In addition, we have and may continue to use capital to pay principal on our borrowings and repurchase our common stock as allowed by our credit agreement. Our primary short-term and long-term sources of liquidity are expected to be cash flows from operations and our credit facility. Based upon current levels of operations and anticipated growth, and the diminishing impacts of the COVID-19 pandemic, we expect cash flows from operations and available borrowing capacity under the credit facility 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 maturing liabilities to pay for capital expenditures,
debt repayment, or to repurchase stock. When necessary, we utilize our credit
facility to satisfy short-term liquidity requirements. We believe our future
cash flows generated from restaurant operations combined with our remaining
borrowing capacity under the credit facility will be sufficient to satisfy any
working capital deficits and our planned capital expenditures.
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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 use different assumptions or conditions. We have identified the following as the Company's most critical accounting policies and estimates, which are most important to the portrayal of the Company's financial condition and results and require management's most subjective and complex judgment. Information regarding the Company'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 Annual Report on Form 10-K. Impairment of Long-Lived Assets - Long-lived assets, including restaurant sites, leasehold improvements, 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. The amount of the impairment loss is measured as the amount by which the carrying value exceeds the fair value of the asset, which is determined using discounted cash flows. Judgments made by management related to 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 2021, the Company determined long-lived assets at ten excess properties were impaired as a result of our cash flow analysis, and recognized non-cash impairment charges of$6.4 million primarily related to the impairment of the long-lived assets associated with excess properties. During 2020, we impaired 40 Company-owned restaurants as a result of our cash flow analysis resulting in non-cash impairment charges of$21.7 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 to 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 2020, the Company impaired information technology assets totaling$5.2 million due to the COVID-19 pandemic redirecting our implementation of certain digital platforms in order to accelerate our speed to market. 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 quoted prices in the active market for the license in the same or similar jurisdictions, representing a level 1 fair value measurement. During the fourth quarter of 2021, the Company performed its annual review of its indefinite lived liquor licenses that had a carrying value of$7.2 million , and recorded impairment charges of$0.5 million to indefinite-lived intangibles in 2021. No impairment charges were recorded to liquor licenses with indefinite lives in 2020, or 2019.
Recently Issued Accounting Standards
See Footnote 2, Recent Accounting Pronouncements, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for our discussion of recently issued accounting standards.
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