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 condensed consolidated financial statements. All comparisons under this heading between 2020 and 2019 refer to the sixteen weeks endedApril 19, 2020 andApril 21, 2019 , 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 full-service restaurants with 554 locations inNorth America . As ofApril 19, 2020 , the Company owned 452 restaurants located in 38 states. The Company also had 102 franchised full-service restaurants in 16 states and one Canadian province as ofApril 19, 2020 . The Company operates its business as one operating and one reportable segment. COVID-19 Pandemic Due to the novel coronavirus ("COVID-19") pandemic, we have navigated and continue to navigate an unprecedented time for our business and industry as we collectively work to combat the global crisis. With the health, safety, and well-being ofRed Robin's Team Members, Guests, and communities as our top priority, we have shifted our restaurants to an off-premise model and are strictly adhering toUS Centers for Disease Control ("CDC"), state, and local guidelines. We are encouraged by our continuing off-premise sales momentum during the pandemic. This has helped mitigate the decline in comparable restaurant revenues due to the closure of dine-in services at substantially all Company-owned restaurants and enabled us to focus on optimizing the execution of our off-premise channels both during and following the crisis. We have taken the following actions to preserve liquidity, enhance financial flexibility and help mitigate the impact of COVID-19 on our business that we believe will enable the Company to more effectively benefit from an eventual recovery in on-premise sales as the impact of COVID-19 subsides: •Temporarily closed dine-in services at substantially all Company-owned restaurants while continuing to provide to-go, delivery, and catering choices and ensuring the continuity of the Company's supply chain; •Temporarily closed 35 Company-owned restaurants. In connection with these closures, restaurant managers were furloughed or transferred to nearby operational restaurants when possible; •Implemented enhanced health and safety protocols across the business, emergency sick pay for hourly Team Members, and telecommuting policies for nearly all corporate level employees; •Significantly reduced restaurant level costs and general and administrative expenses, including reducing by 20 percent executive base salaries, Board member cash retainer fees, and restaurant support center and non-furloughed restaurant supervisory Team Member wages and salaries; •Eliminated approximately 50 restaurant support center general and administrative positions; •Reduced selling expense by pivoting from national media to digital in support of our off-premise business; •Postponed or eliminated all non-essential spending, including capital expenditures for previously planned growth and other projects, including the Company's continued rollout of Donatos®, restaurant refreshes, and IT projects; prior to the pandemic, the Company purchased Donatos® equipment for theSeattle market, including approximately 40 restaurants. We currently plan to resume our roll out of Donatos® in this legacy market by the end of the year; •Drew down the remaining capacity under the Company's$300 million credit facility; •Suspended share repurchases and terminated the Company's pre-arranged stock trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended; and •Began to engage in constructive discussions with landlords regarding potential restructuring of lease payments. In light of the uncertainty regarding the duration and impact of the COVID-19 pandemic,Red Robin withdrew its 2020 and long-term financial outlook. 15 -------------------------------------------------------------------------------- Table of Contents Comparable restaurant revenues and average net sales per restaurant following the onset of the COVID-19 pandemic inthe United States through the first quarter endedApril 19, 2020 are as follows: QTD Week ended through 23-Feb(1) 1-Mar 8-Mar 15-Mar 22-Mar 29-Mar 5-Apr 12-Apr 19-Apr Weekly Net Comparable 3.7% 0.9% (3.7)% (26.3)% (72.7)% (70.5)% (63.9)% (65.2)% (50.2)% Restaurant Revenues(2) Average Net Sales per$53,798 $57,596 $56,364 $43,079 $16,421 $18,031 $21,177 $19,527 $26,444 Restaurant
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(1)February 23, 2020 represents the end of our second 28 day accounting period (2) The 35 temporarily closed Company-owned restaurants are not included in the weekly comparable base Through the first eight weeks of the first quarter of 2020, net comparable restaurant revenue grew 3.7% driven in part by positive Guest count, and through the last eight weeks of the first quarter of 2020, comparable restaurant revenue decreased 43.2%. Although comparable restaurant revenues have declined significantly as a result of the COVID-19 pandemic, average net sales per restaurant have grown each week since the onset of the pandemic with the exception of the week endedApril 12, 2020 due to the timing of the Easter holiday. While the COVID-19 pandemic significantly impacted our full first quarter results, we are very encouraged by the continued strong growth in sales. Second Quarter Business and Operational Update We continue to be encouraged by the strong growth in off-premise sales and early traction in dine-in sales that is attributable to our enhanced execution developed around our strategic plan and implemented on an accelerated basis as we begin to re-open dining rooms with a measured and strategic approach focused on health and safety. Off-premise sales remain significantly higher, which have tripled when compared to pre-COVID-19 levels. As our dining rooms have re-open, sales have been positively impacted by the accelerated implementation of our new hospitality model, coupled with strong health and safety standards. Notably, restaurants with re-opened dining rooms are still capturing meaningful off-premise sales, demonstrating the enduring and growing popularity ofRed Robin for off-premise occasions. Relevant year-to-date highlights as ofJune 7, 2020 include: •Preliminary net comparable restaurant revenue of (39.7)% for the week endedJune 7, 2020 ; •Preliminary net comparable restaurant revenue for restaurants with re-opened dining rooms was (26.7)% for the week endedJune 7, 2020 ; •Expected average cash burn of$1 million to$2 million per week, which includes partial rent payments, re-opening costs, one-time COVID-19 expenses, and costs associated with finalizing the Amendment to its Credit Facility, for the second fiscal quarter driven by improving revenue and previously taken cost reductions; and •Approximately$84.0 million in total liquidity, including capacity under our revolving line of credit as ofJune 7, 2020 . The Company immediately accelerated its menu simplification plan by reducing approximately one third of its menu items to support the off-premise only business model. The simplified menu and ease of ordering from a new enhanced website focused on the online ordering user experience have improved speed of service and accuracy. Increased car-side and home delivery options, including Red Robin Delivery where Guests order directly fromRed Robin with outsourced delivery, have improved convenience to our Guests and the economics of our off-premise business. The Company spent considerable time developing a measured and strategic approach to re-open dining rooms with a focus on the health and safety of our Guests and Team Members. Consumer research also led to several enhanced measures including all Team Members wearing face coverings and completing daily health surveys, including temperature checks, and social distancing protocols.Red Robin has made visible cleaning and disinfecting behaviors important elements of its daily operations, including dedicating one Team Member on each shift to front of house sanitation. In addition, all re-opened dining rooms feature the Company's new hospitality model, Total Guest Experience ("TGX"), thatRed Robin had previously planned to implement over the course of fiscal 2020. Sales have continued to grow as the Company began re-opening select dining rooms at a limited capacity beginningApril 28, 2020 . As ofJune 7, 2020 ,Red Robin had re-opened approximately 270 dining rooms with limited capacity representing 65% of currently open Company-operated restaurants. To build on the momentum we are experiencing in off-premise and dine-in sales, we are now re-opening restaurants in our largest and highest volume markets on theWest Coast . Notably, these restaurants have on average maintained off-premise sales that are approximately one and a half to two times pre COVID-19 levels and 40% of sales mix since re-opening. 16 -------------------------------------------------------------------------------- Table of Contents Overall during the beginning of our second quarter of 2020, the Company's weekly comparable restaurant revenue has sequentially improved. Preliminary net comparable restaurant revenue and average net sales per restaurant through the week endedJune 7, 2020 is as follows: Week ended Company-owned Restaurants 26-Apr 3-May 10-May 17-May 24-May 31-May
7-Jun
Weekly Net Comparable Restaurant (56.0)% (54.7)% (52.2)% (47.9)% (47.0)% (43.8)% (39.7)% Revenues(1) Average Net Sales per Restaurant$24,435 $24,514 $27,202 $28,895 $29,598 $32,239 $34,222 # of Comparable Company-owned 414 414 414 414 414 414 414 Restaurants
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(1) The 35 temporarily closed Company-owned restaurants are not included in the weekly comparable base Financial and Operational Highlights The following summarizes the operational and financial highlights during the sixteen weeks endedApril 19, 2020 : •Financial performance. •Restaurant revenue decreased$99.1 million , or 24.7%, to$301.4 million for the sixteen weeks endedApril 19, 2020 , as compared to the sixteen weeks endedApril 21, 2019 , due to a$74.6 million , or 20.8%, decrease in comparable restaurant revenue and a$24.5 million decrease primarily from closed restaurants. •Restaurant operating costs, as a percentage of restaurant revenue, increased 950 basis points to 91.2% for the sixteen weeks endedApril 19, 2020 , as compared to 81.7% for the sixteen weeks endedApril 21, 2019 . The increase was primarily due to higher labor costs, higher other operating costs, and higher occupancy costs as a percentage of revenue. The drivers within labor costs included sales deleverage, higher wage rates and higher group insurance costs, partially offset by lower restaurant manager incentive compensation. The drivers within other operating costs included higher third-party delivery expense driven by increasing volumes and sales deleverage impacts on restaurant maintenance, technology, supply, utility costs. The drivers within occupancy costs included sales deleverage impacts on rent expense and general liability and other real estate costs. •Net loss was$174.3 million for the sixteen weeks endedApril 19, 2020 compared to net income of$0.6 million for the sixteen weeks endedApril 21, 2019 . Diluted loss per share was$13.51 for the sixteen weeks endedApril 19, 2020 , as compared to diluted earnings per share of$0.05 for the sixteen weeks endedApril 21, 2019 . Excluding costs per diluted share included in Other charges of$5.48 for goodwill impairment,$0.89 for restaurant asset impairment,$0.26 litigation contingencies,$0.08 for board and stockholder matters costs,$0.08 for restaurant closure and refranchising costs,$0.05 for severance and executive transition costs, and$0.01 for COVID-19 related charges, adjusted loss per diluted share for the first quarter endedApril 19, 2020 , was$6.66 . Excluding costs per share included in Other charges of$0.11 for severance and executive transition costs,$0.02 for restaurant closure costs, and$0.01 for executive retention, adjusted earnings per diluted share for the sixteen weeks endedApril 21, 2019 was$0.19 . We believe the non-GAAP measure of adjusted (loss) 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 ourU.S. Company -ownedRed 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 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 Guest base. During the first quarter of 2020, we pivoted our focus to digital marketing, which has proven to be an effective medium for interacting with our Guests during the COVID-19 pandemic. 17 -------------------------------------------------------------------------------- Table of Contents Restaurant Data The following table details restaurant unit data for our Company-owned and franchised locations for the periods indicated: Sixteen Weeks Ended April 19, 2020 April 21, 2019 Company-owned: Beginning of period 454 484 Closed during the period(1) (2) (1) End of period 452 483 Franchised: Beginning of period 102 89 End of period 102 89 Total number of restaurants 554 572
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(1) In addition to two permanent closures during the sixteen weeks ended
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Results of Operations
Operating results for each fiscal period presented below are expressed as a
percentage of total revenues, except for the components of restaurant operating
costs, which are expressed as a percentage of restaurant revenue.
This information has been prepared on a basis consistent with our audited 2019
annual financial statements, and, in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented. Our operating
results may fluctuate significantly as a result of a variety of factors, and
operating results for any period presented are not necessarily indicative of
results for a full fiscal year.
Sixteen Weeks Ended
April 19, 2020 April 21, 2019
Revenues:
Restaurant revenue 98.5 % 97.7 %
Franchise and other revenues 1.5 2.3
Total revenues 100.0 % 100.0 %
Costs and expenses:
Restaurant operating costs (exclusive of depreciation and amortization
shown separately below):
Cost of sales 23.4 % 23.4 %
Labor 39.3 35.7
Other operating 17.3 13.9
Occupancy 11.2 8.7
Total restaurant operating costs 91.2 81.7
Depreciation and amortization 9.3 6.9
Selling, general and administrative 13.6 11.7
Pre-opening and acquisition costs - 0.1
Other charges 39.0 0.6
(Loss) income from operations (51.7) 0.8
Interest expense, net and other 1.1 0.8
(Loss) income before income taxes (52.8) -
Income tax expense (benefit) 4.1 (0.1)
Net (loss) income (56.9) % 0.2 %
___________________________________
Certain percentage amounts in the table above do not total due to rounding as
well as restaurant operating costs being expressed as a percentage of restaurant
revenue and not total revenues.
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Revenues
Sixteen Weeks Ended
Percent
(Revenues in thousands) April 19, 2020 April 21, 2019 Change
Restaurant revenue $ 301,434 $ 400,484 (24.7) %
Franchise royalties, fees and other revenue 4,631 9,382 (50.6) %
Total revenues $ 306,065 $ 409,866 (25.3) %
Average weekly sales volumes in Company-owned restaurants
(19.3) %
Total operating weeks 7,214 7,731 (6.7) %
Net sales per square foot $ 109 $ 133 (17.8) %
Restaurant revenue for the sixteen weeks ended April 19, 2020 , which comprises
primarily food and beverage sales, decreased $99.1 million , or 24.7%, as
compared to first quarter 2019. The decrease was due to a $74.6 million , or
20.8%, decrease in comparable restaurant revenue and a $24.5 million decrease
from closed restaurants. The comparable restaurant revenue decrease was driven
by a 20.9% decrease in Guest count partially offset by a 0.1 % increase in
average Guest check. The decrease in Guest count was primarily driven by a 22.0%
decrease caused by the COVID-19 pandemic, partially offset by an increase in
off-premise Guest count. The increase in average Guest check resulted from a 1.6
% increase in pricing and a 0.3 % increase from lower discounting, partially
offset by a 1.8% decrease in menu mix. The decrease in menu mix was primarily
driven by the Company's operating shift to off-premise only, resulting in lower
sales of beverages and Finest burgers. Off-premise sales increased 86.1% and
comprised 26.3% of total food and beverage sales during the first quarter of
2020.
Average weekly 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 at the end of each
period presented. The 35 temporarily closed Company-owned restaurants were not
included in the comparable base during the first quarter of 2020. New
restaurants are restaurants that are open but 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. Net sales per square foot represents the total 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 and other revenue decreased $4.8 million for the sixteen weeks ended
April 19, 2020 compared to the sixteen weeks ended April 21, 2019 due to the
temporary abatement of all franchisee royalty and advertising contribution
payments in response to COVID-19's effect on our franchisee's operations. Our
franchisees reported a comparable restaurant revenue decrease of 23.3% for the
sixteen weeks ended April 19, 2020 compared to the sixteen weeks ended April 21,
2019 .
Cost of Sales
Sixteen Weeks Ended
(In thousands, except percentages)
$ 70,426 $ 93,715 (24.9) % As a percent of restaurant revenue 23.4 % 23.4 % - % 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 remained flat for the sixteen weeks endedApril 19, 2020 as compared to the same period in 2019. A decrease in beverage costs was offset by an increase in ground beef prices. Labor Sixteen Weeks Ended (In thousands, except percentages) April 19,
2020
$ 118,566 $ 142,894 (17.0) % As a percent of restaurant revenue 39.3 % 35.7 % 3.6 % Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits. For the sixteen weeks endedApril 19, 2020 , labor as a percentage of restaurant revenue increased 360 basis points compared to the same period in 2019. The increase was primarily due to sales deleverage, higher wage rates, and higher group insurance costs partially offset by lower restaurant manager incentive compensation. 20 -------------------------------------------------------------------------------- Table of Contents Other Operating Sixteen Weeks
Ended
(In thousands, except percentages)
$ 52,291 $ 55,565 (5.9) % As a percent of restaurant revenue 17.3 % 13.9 % 3.4 % Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs. For the sixteen weeks endedApril 19, 2020 , other operating costs as a percentage of restaurant revenue increased 340 basis points as compared to the same period in 2019. The increase was primarily due to an increase in third-party delivery fees driven by higher off-premise sales volumes and sales deleverage impacts on restaurant maintenance, technology, supply, and utility costs. Occupancy Sixteen Weeks Ended
(In thousands, except percentages)
$ 33,657 $ 35,020 (3.9) % As a percent of restaurant revenue 11.2 % 8.7 % 2.5 % 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. For the sixteen weeks endedApril 19, 2020 , occupancy costs as a percentage of restaurant revenue increased 250 basis points over the same periods in 2019 primarily due to sales deleverage impacts on rent expense and general liability and other real estate costs. Our fixed rents for the sixteen weeks endedApril 19, 2020 andApril 21, 2019 were$21.6 million and$23.2 million , a decrease of$1.6 million due to permanent restaurant closures. Depreciation and Amortization Sixteen Weeks
Ended
(In thousands, except percentages)
$ 28,320 $ 28,438 (0.4) % As a percent of total revenues 9.3 % 6.9 % 2.4 % 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. For the sixteen week periods endedApril 19, 2020 , depreciation and amortization expense as a percentage of revenue increased 240 basis points over the same periods in 2019 primarily due to sales deleverage. Selling, General, and Administrative Sixteen Weeks
Ended
(In thousands, except percentages)
(13.7) %
As a percent of total revenues 13.6 % 11.7 % 1.9 %
Selling, general, and administrative costs include all corporate and
administrative functions. Components of this category include marketing and
advertising costs; restaurant support center, regional, and franchise support
salaries and benefits; travel; professional and consulting fees; corporate
information systems; legal expenses; office rent; training; and board of
directors expenses.
Selling, general, and administrative costs in the sixteen weeks ended April 19,
2020 decreased $6.6 million , or 13.7%, as compared to the same period in 2019.
The decrease was primarily due to decreased national media spend, Team Member
benefits, and travel and entertainment, professional services, gift card
related, and project-related G&A costs, partially offset by increased Team
Member salary and wages stemming from merit salary increases.
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Pre-opening Costs
Sixteen Weeks Ended
(In thousands, except percentages) April 19, 2020 April 21, 2019 Percent Change
Pre-opening costs $ 153 $ 319 (52.0) %
As a percent of total revenues - % 0.1 % (0.1) %
Pre-opening costs, which are expensed as incurred, comprise the costs related to
preparing restaurants to introduce Donatos® and other initiatives, as well as
direct costs, including labor, occupancy, training, and marketing, incurred
related to opening new restaurants and hiring the initial work force. Our
pre-opening costs fluctuate from period to period, depending upon, but not
limited to, the number of restaurants where Donatos® has been introduced, the
number of restaurant openings, the size of the restaurants being opened, and the
location of the restaurants. Pre-opening costs for any 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 minimal pre-opening costs during the sixteen weeks ended April 19,
2020 relating to the roll out of Donatos® in select restaurants, which is a
decrease of $0.2 million as compared to the same period in 2019. The decrease
was driven by the Company temporarily suspending the introduction of Donatos® to
additional restaurants due to the impact of COVID-19 on the business. Prior to
the COVID-19 pandemic, we purchased Donatos® equipment for the Seattle market,
including approximately 40 restaurants. We currently plan to resume our roll out
of Donatos® in this legacy market by the end of the year.
Goodwill
The Company determined the sustained decrease in our stock price coupled with
the closure of our dining rooms and significant decline to the equity value of
our peers and overall U.S. stock market represented a goodwill impairment
triggering event. We performed a quantitative analysis as of our first quarter
ended April 19, 2020 to determine if impairment to our goodwill existed for our
one reporting unit. We used a blended approach in calculating fair value of our
one reporting unit including the income approach, market approach, and market
capitalization approach. This analysis resulted in full impairment of our
goodwill balance totaling $95.4 million recognized during the sixteen weeks
ended April 19, 2020 included in Other charges on the condensed consolidated
statement of operations and comprehensive (loss) income. The goodwill impairment
was measured as the amount by which the carrying amount of the reporting unit,
including goodwill, exceeded its fair value.
Restaurant Assets
The Company determined the triggering event described above also represented a
restaurant asset impairment triggering event. The Company recognized $15.5
million of impairment related to restaurant assets during the sixteen weeks
ended April 19, 2020 included in Other charges on the condensed consolidated
statement of operations and comprehensive (loss) income resulting from the
continuing and projected future results of 24 Company-owned restaurants.
Recoverability of restaurant assets, including restaurant sites, leasehold
improvements, information technology systems, right-of-use assets, amortizable
intangible assets, and other fixed 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. Each restaurant's past and present operating performance was reviewed in
combination with projected future results primarily through projected
undiscounted cash flows that included management's expectation of future
financial impacts from COVID-19. If the restaurant assets were determined to be
impaired through comparison of the assets carrying value to its undiscounted
cash flows, the Company compared the carrying amount of each restaurant's assets
to its fair value as estimated by management to calculate the impairment amount.
The fair value of restaurant assets is generally determined using a discounted
cash flow projection model, which is based on significant inputs not observed in
the market and represents a level 3 fair value measurement. In certain cases,
management uses other market information, when available, to estimate the fair
value of a restaurant's assets. The restaurant asset impairment charges
represent the excess of the carrying amount over the estimated fair value of the
restaurant assets calculated using a discounted cash flow projection model.
Additional restaurant asset impairment may be required to be recognized if the
COVID-19 pandemic continues to negatively impact our business.
Interest Expense, Net and Other
Interest expense, net and other was $3.4 million for the sixteen weeks ended
April 19, 2020 , an increase of $0.2 million , or 6.2%, from the same period in
2019. The increase was primarily related to a higher weighted average
outstanding debt balance partially offset by a lower weighted average interest
rate compared to the same period in 2019. Our weighted average interest rate was
4.7% for the sixteen weeks ended April 19, 2020 as compared to 5.0% for the
sixteen weeks ended April 21, 2019 .
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Provision for Income Taxes
The effective tax rate for the sixteen weeks ended April 19, 2020 was a 7.9%
expense, compared to a 291.4% benefit for the sixteen weeks ended April 21,
2019 . The increase in tax expense is primarily due to a decrease in current year
tax credits and the recognition of a valuation allowance on our tax credit
deferred tax asset, partially offset by a decrease in income and favorable rate
impact of net operating loss ("NOL") carrybacks allowed as part of the
Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which could
generate up to $12 million of projected cash tax refunds within the next 12
months.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
future reversals of existing deferred tax liabilities and projected future
taxable income, including whether future originating deductible temporary
differences are likely to be realized. The Company generates FICA tip credits
based on revenue of the Company which can be utilized to offset 75% of taxes
payable and may be carried forward for a period of 20 years to the extent they
are not utilized in the year they are generated. As a result of the anticipated
NOLs in 2019 and the projected NOLs in 2020 as permitted under the CARES Act,
approximately $38 million of the previously utilized FICA tip tax credits will
be reinstated. While the existing FICA tip credit carryforwards as of April 19,
2020 will be utilized based on projected future taxable income, they are
anticipated to be replaced by originating FICA tip credits that are not
projected to be utilized in the carry forward period. Therefore, a $52 million
valuation allowance has been established for the FICA tip credit carryforwards.
To the extent future actual taxable income exceeds the current projections, the
FICA tip credit carryforwards may become realizable and will require us to
reassess our valuation allowance in the future.
Liquidity and Capital Resources
Cash and cash equivalents increased $58.9 million to $88.9 million at April 19,
2020 , from $30.0 million at the beginning of the fiscal year. As the Company
continues to manage the impact of COVID-19, available cash will be used to
provide operating liquidity. As of June 7, 2020 , the Company had $30.0 million
of cash on hand and $54.0 million of available borrowing capacity under its
revolving line of credit.
Cash Flows
The table below summarizes our cash flows from operating, investing, and
financing activities for each period presented (in thousands):
Sixteen Weeks Ended
April 19, 2020 April 21, 2019
Net cash (used in) provided by operating activities $ (13,320) $ 25,291
Net cash used in investing activities (8,703) (10,077)
Net cash provided by (used in) financing activities 81,738 (10,845)
Effect of currency translation on cash (840) 21
Net increase (decrease) in cash and cash equivalents $
58,875
Operating Cash Flows Net cash flows (used in) provided by operating activities decreased$38.6 million to$13.3 million for the sixteen weeks endedApril 19, 2020 . The changes in net cash (used in) provided by operating activities are primarily attributable to a$37.4 million decrease in profit from operations, as well as changes in working capital as presented in the condensed consolidated statements of cash flows. Investing Cash Flows Net cash flows used in investing activities decreased$1.4 million to$8.7 million for the sixteen weeks endedApril 19, 2020 , as compared to$10.1 million for the same period in 2019. The decrease is primarily due to decreased investment in restaurant technology and new restaurants and restaurant refreshes. 23 -------------------------------------------------------------------------------- Table of Contents The following table lists the components of our capital expenditures, net of currency translation effect, for the sixteen weeks endedApril 19, 2020 andApril 21, 2019 (in thousands): Sixteen Weeks
Ended
April 19, 2020 April 21, 2019
Restaurant maintenance capital and other $ 6,656 $ 4,819
Investment in technology infrastructure and other 2,090 4,538 New restaurants - 838 Total capital expenditures$ 8,746 $ 10,195 Financing Cash Flows Cash provided by financing activities increased$92.6 million to$81.7 million for the sixteen weeks endedApril 19, 2020 , as compared to the same period in 2019. The increase primarily resulted from a$94.2 million increase in net draws made on long-term debt, partially offset by an increase of cash used for debt issuance costs and repurchases of the Company's common stock before the Company temporarily suspended the share repurchase program due to COVID-19. Credit Facility OnJanuary 10, 2020 , the Company replaced its prior credit facility with a new five-year Amended and Restated Credit Agreement (the "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 inDecember 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 Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q for further discussion. As ofApril 19, 2020 , the Company had outstanding borrowings under the Credit Facility of$290 million , in addition to to amounts issued under letters of credit of$7.5 million . Amounts issued under letters of credit reduce the amount available under the Credit Facility but are not recorded as debt. As ofApril 19, 2020 , we had no remaining borrowing capacity under the Credit Facility to help mitigate the impact of COVID-19 on our business and provide operating liquidity. Net draws during the quarter totaled$84 million . Per the maximum cash balance limitation required in the First Amendment to the Credit Agreement and Waiver (the "Amendment") to our Credit Facility, the Company made a$59 million repayment on the revolving line of credit onMay 29, 2020 to ensure cash on hand did not exceed$30 million . See Note 2, COVID-19 Pandemic, in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion of the Amendment. Covenants We are subject to a number of customary covenants under our Credit Facility, including limitations on additional borrowings, acquisitions, stock repurchases, sales of assets, and dividend payments. As ofApril 19, 2020 , we were not in compliance with our debt covenants due to the negative effects on our business from the COVID-19 pandemic. As a result, we entered into the Amendment to our Credit Facility, which waives compliance with the lease adjusted leverage ratio financial covenant and fixed charge coverage ratio financial covenant for the remainder of fiscal 2020 providing the Company issues new equity (or convertible debt) generating net cash proceeds of at least$25 million on or beforeNovember 13, 2020 . Going Concern The Company is actively evaluating options for raising equity capital in order to satisfy the requirements of the Amendment. If the Company is unable to raise sufficient equity capital within the timeframe prescribed by the Amendment, and is unable to obtain a further waiver or amendment to the Credit Facility, then the Company could experience an event of default under the Credit Facility, which could have a material adverse effect on the Company's liquidity, financial condition, and results of operations. We cannot make any assurance regarding the likelihood, certainty, or exact timing of the Company's ability to raise capital or execute further amendments to the Credit Facility. As a result, under applicable accounting standards, the Company concluded, because the equity raise is outside of management's control, substantial doubt exists surrounding the Company's ability to meet its obligations within one year of the financial statement issuance date and to continue as a going concern. 24 -------------------------------------------------------------------------------- Table of Contents Debt Outstanding Total debt outstanding increased$84.0 million to$290.9 million atApril 19, 2020 , from$206.9 million atDecember 29, 2019 , due to net draws of$84 million on the Credit Facility during the sixteen weeks endedApril 19, 2020 . 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. However, the Company has recently leveraged its Credit Facility to provide operating liquidity as compared to cash received from restaurant sales during the COVID-19 pandemic due to restaurant dining room closures and our operational shift to off-premise only. As the COVID-19 pandemic continues to negatively impact our business, the Company is closely monitoring the effects on our working capital deficit and continues to assess other sources of operating liquidity including, but not limited to, raising additional capital, lease concessions and deferrals, and further reductions of operating and capital expenditures. 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 was effective as ofAugust 9, 2018 , and 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 throughApril 19, 2020 , 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 ofApril 19, 2020 , 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. Our ability to repurchase shares is limited to conditions set forth by our lenders in the Amendment to our Credit Facility prohibiting us from repurchasing additional shares until the later of (a) the Company's delivery of a compliance certificate for the fiscal quarter ending on or aboutJuly 11, 2021 demonstrating compliance with the financial covenants then in effect and (b) the Company satisfying an agreed ratio under its Leverage Ratio Covenant for the most recently ended fiscal quarter or fiscal year, as applicable. Inflation The primary inflationary factors affecting our operations are food, labor 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 rates 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. Labor cost inflation had a negative impact on our financial condition and results of operations during the sixteen weeks endedApril 19, 2020 . 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 have a negative impact on labor costs for the remainder of 2020. 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 and lower during the fall season. As a result, our quarterly operating results and comparable restaurant revenue may fluctuate significantly as a result of seasonality. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter, and comparable restaurant sales for any particular future period may decrease. 25 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations There were no material changes outside the ordinary course of business to our contractual obligations since the filing of Company's Annual Report on Form 10-K for the fiscal year endedDecember 29, 2019 , except for long-term debt obligations resulting from the changes to our Credit Facility inJanuary 2020 as previously discussed. Contractual long-term debt payments as ofApril 19, 2020 are as follows (in thousands):
Payments Due by Period
Total 2020
2021 - 2022 2023 - 2024 2025 and Thereafter
Long-term debt obligations(1)
________________________________________________________
(1) Long-term debt obligations primarily represent minimum required principal payments under our Credit Facility including estimated interest of$53.5 million based on a 3.91% average borrowing interest rate. 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 future impact from the COVID-19 pandemic, and we might obtain different results if we use different assumptions or conditions. We had no significant changes in our critical accounting policies and estimates which were disclosed in our Annual Report on Form 10-K for the fiscal year endedDecember 29, 2019 . Recently Issued and Recently Adopted Accounting Standards See Note 1, Basis of Presentation and Recent Accounting Pronouncements, of Notes to Condensed Consolidated Financial Statements of this report. 26 -------------------------------------------------------------------------------- Table of Contents 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, and Section 21E of the Securities Exchange Act of 1934, as amended. 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," "estimate," "could," "expect," "future," "intend," "may," "plan," "project," "will," "would," and similar expressions. Certain forward-looking statements are included in this Quarterly Report on Form 10-Q, principally in the sections captioned "Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements in this report include, among other things: our financial performance, strategic initiatives, marketing strategy and promotions; expected uses for available cash flow; capital investments; beliefs about the ability of our lenders to fulfill their lending commitments under our Credit Facility and about the sufficiency of future cash flows to satisfy any working capital deficit and planned capital expenditures; the anticipated effects of inflation on labor and commodity costs; future performance including sales, guest satisfaction scores, preliminary results including net comparable restaurant revenue, average net sales per restaurant, cash burn, and liquidity; statements under the heading "Second Quarter Business and Operational Update," anticipated rollout of Donatos in ourSeattle market; and the effect of the adoption of new accounting standards on our financial and accounting systems. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those we express in these forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the effectiveness of our business strategy and improvement initiatives, including the effectiveness of our overall value proposition, service improvement, technology, and off-premise initiatives to drive traffic and sales; the effectiveness of our marketing campaigns; our ability to effectively use and monitor social media; uncertainty regarding general economic and industry conditions; concentration of restaurants in certain 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, and distribution costs; changes in energy and labor costs, including due to changes in health care and market wage levels; 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; our franchising strategy; our ability to attract and retain 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; the ability to obtain equity financing as required under our Credit Facility; costs and other effects of legal claims by Team Members, franchisees, customers, vendors, stockholders, including relating to fluctuations in our stock price, 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; changes in accounting standards policies and practices or related interpretations by auditors or regulatory entities; the extent of the impact of the COVID-19 global pandemic or any other epidemic, disease outbreak, or public health emergency, including the duration, spread, severity, and any recurrence of the COVID-19 pandemic, the duration and scope of related government orders and restrictions, the impact on our Team Members, economic, public health, and political conditions that impact consumer confidence and spending, including the impact of COVID-19 and other health epidemics or pandemics on the global economy; the cash tax refund received as a result of the CARES act; the rapidly evolving nature of the COVID-19 pandemic and related containment measures, including the potential for a complete shutdown of Company restaurants; changes in unemployment rate; the ability to achieve significant cost savings; the Company's ability to defer lease or contract payments or otherwise obtain concessions from landlords, vendors, and other parties in light of the impact of the COVID-19 pandemic; the economic health of the Company's landlords and other tenants in retail centers in which its restaurants are located; the economic health of suppliers, licensees, vendors, and other third parties providing goods or services to the Company; the impact from political protests and curfews imposed by state and local governments; and other risk factors described from time to time in the Company's Form 10-K, Form 10-Q, and Form 8-K reports (including all amendments to those reports) filed with theU.S. Securities and Exchange Commission . 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. 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 arising after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. 27
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