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 twelve and forty weeks endedOctober 4, 2020 andOctober 6, 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 547 locations inNorth America . As ofOctober 4, 2020 , the Company owned 444 restaurants located in 38 states. The Company also had 103 franchised full-service restaurants in 16 states and one Canadian province. The Company operates its business as one operating and one reportable segment. Company Response to COVID-19 Pandemic Due to the novel coronavirus ("COVID-19") pandemic, we continue to navigate an unprecedented time for our business and industry. During the third quarter of 2020, the Company continued to expand outdoor seating capacity at reopened Company-owned restaurants in accordance with local limits. Reopening dining rooms and expanding seating capacity was executed with the health, safety, and well-being ofRed Robin's Team Members, Guests, and communities in mind with strict adherence toUS Centers for Disease Control and Prevention , state, and local guidelines as our top priority. Our continued focus during the COVID-19 pandemic on delivering best-in-class hospitality has resulted in improved average weekly net sales per restaurant and record high Guest satisfaction scores since the onset of the pandemic in early March. We remain focused on expanding indoor and outdoor seating capacity, retaining off-premise sales levels, and consistently delivering a great Guest experience to continue to drive our improving sales. We expect to build further sales momentum from additional seating expansion, including use of outdoor all-weather tents and indoor booth partitions. We also continue to require Guests to wear face coverings at all locations while entering, exiting, and walking around our restaurants, and face masks are provided for Guests who arrive without one to ensure we are enabling the mutual safety of our Guests and Team Members. As our dining rooms have reopened, sales and the Guest experience have been positively impacted by the accelerated implementation of our new Total Guest Experience ("TGX") hospitality model, coupled with strong adherence to health and safety standards. Notably, restaurants with reopened dining rooms are retaining meaningful off-premise sales, demonstrating the enduring and growing popularity ofRed Robin for off-premise occasions. We have secured the Company's long-term viability through increased liquidity from our at-the-market equity offering, reductions in overhead costs, receipt of a$49.4 million federal cash tax refund subsequent to the third quarter balance sheet date, including interest, provided under the provisions of the CARES Act, and$12 million to$15 million of additional federal cash tax refunds expected to be received in 2021. This allows us to resume full implementation of the Company's previously disclosed strategic plan to transform the business and create long-term stockholder value through delivering best-in-class execution, including implementing our TGX hospitality model, rolling out Donatos® Pizza, optimizing the restaurant portfolio, and enhancing our technological and digital capabilities to drive increased Guest engagement and frequency with our brand. The Company was required to re-close dining rooms during the second fiscal quarter at numerous Company-owned restaurants, including 53 indoor dining rooms inCalifornia due to a state mandate in early July, from the effects of increased COVID-19 cases in certain states and localities. These indoor dining rooms have started to reopen during the third fiscal quarter, while maintaining improved off-premise performance. Each of our franchisees' restaurants remained open as of the end of our third fiscal quarter, and we started charging and collecting full royalty payments and advertising contributions from our franchisees as of the end of our third fiscal quarter. As ofNovember 1, 2020 , the Company has reopened 370 total (comparable and non-comparable) indoor dining rooms with limited capacity, representing approximately 89% of currently open Company-owned restaurants. Notably, these restaurants have on average maintained off-premise sales that are approximately 35% of sales mix after reopening dining rooms. As of the filing date of this Form 10-Q, 18 restaurants remain temporarily closed due to the COVID-19 pandemic. We will continue to evaluate the potential timing of reopening these remaining temporarily closed restaurants. Restaurant operating level expenses incurred for these restaurants during the temporary closures have been recorded in Restaurant closure and refranchising costs (gains) in Other charges (gains); see Note 7, Other Charges (Gains), in the Notes to the Condensed Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q. 14 -------------------------------------------------------------------------------- Table of Contents Net comparable restaurant revenue and average weekly net sales per Company-owned restaurant with reopened indoor dining rooms for the Company's 28 day accounting periods throughNovember 1, 2020 is as follows: Period Ended(2) Reopened Company-owned Restaurant Indoor Dining Rooms 9-Aug 6-Sept 4-Oct 1-Nov(3) Net comparable restaurant revenues (29.1)% (20.1)% (9.5)% (13.7)% Average weekly net sales per restaurant$38,779 $41,272 $43,034 $42,778 # of comparable Company-owned restaurants(1) 340 347 381 362
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(1) Net sales performance for Company-owned restaurants with reopened indoor dining rooms for the full period presented. Restaurant count is as of the end of the period presented. (2) The period endedAugust 9 ,September 6 , andOctober 4, 2020 comprise the Company's third fiscal quarter. The period endedNovember 1, 2020 falls within our fourth fiscal quarter, and amounts presented for the period are preliminary. (3) Sales performance at restaurants with reopened dining rooms during the period endedNovember 1, 2020 was negatively impacted by rising COVID-19 cases resulting in new restrictions lowering dining room capacity in certain states and localities. The negative impact was partially offset by sales benefits from expanded outdoor seating and increased use of booth partitions, improved off-premise sales performance inCalifornia , and average check growth during the period. Additionally,Halloween shifted from a Thursday to a Saturday in 2020, negatively impacting comparable restaurant revenues by approximately 1.0% to 2.0% for the period endedNovember 1, 2020 . Net comparable restaurant revenue and average weekly net sales per Company-owned restaurant for the Company's 28 day accounting periods throughNovember 1, 2020 is as follows: Period Ended(2) Company-owned Restaurants 9-Aug 6-Sept 4-Oct 1-Nov(3) Net comparable restaurant revenues (34.2)% (24.9)% (14.9)% (15.4)% Average weekly net sales per restaurant$36,830 $39,728 $41,731 $42,509 # of comparable Company-owned restaurants(1) 412 412 412 412
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(1) Comparable restaurants are those Company-owned restaurants that have operated five full quarters as of the period or week presented. Restaurant count shown is as of the end of the period or week presented. (2) The period endedAugust 9 ,September 6 , andOctober 4, 2020 comprise the Company's third fiscal quarter. The period endedNovember 1, 2020 falls within our fourth fiscal quarter, and amounts presented for the period are preliminary. (3) Sales performance at restaurants with reopened dining rooms during the period endedNovember 1, 2020 was negatively impacted by rising COVID-19 cases resulting in new restrictions lowering dining room capacity in certain states and localities. The negative impact was partially offset by sales benefits from expanded outdoor seating and increased use of booth partitions, improved off-premise sales performance inCalifornia , and average check growth during the period. Additionally,Halloween shifted from a Thursday to a Saturday in 2020, negatively impacting comparable restaurant revenues by approximately 1.0% to 2.0% for the period endedNovember 1, 2020 . 15 -------------------------------------------------------------------------------- Table of Contents Financial and Operational Highlights The following summarizes the operational and financial highlights during the twelve and forty weeks endedOctober 4, 2020 : •Restaurant revenue decreased$92.9 million , or 32.0%, to$197.0 million for the twelve weeks endedOctober 4, 2020 , as compared to the twelve weeks endedOctober 6, 2019 , due to a$65.7 million , or 25.1%, decrease in comparable restaurant revenue and a$27.2 million decrease primarily from closed restaurants. •Restaurant revenue decreased$334.2 million , or 33.7%, to$658.6 million for the forty weeks endedOctober 4, 2020 , as compared to the forty weeks endedOctober 6, 2019 , due to a$252.1 million , or 28.3%, decrease in comparable restaurant revenue and a$82.1 million decrease primarily from closed restaurants. •Restaurant operating costs, as a percentage of restaurant revenue, increased 750 basis points to 91.4% for the twelve weeks endedOctober 4, 2020 , as compared to 83.9% for the twelve weeks endedOctober 6, 2019 . The increase was due to higher other operating costs, labor costs, and occupancy costs as a percentage of restaurant revenue, partially offset by lower cost of sales as a percentage of restaurant revenue. •Restaurant operating costs, as a percentage of restaurant revenue, increased 1,050 basis points to 92.9% for the forty weeks endedOctober 4, 2020 , as compared to 82.4% for the forty weeks endedOctober 6, 2019 . The increase was due to higher other operating costs, labor costs, and occupancy costs as a percentage of restaurant revenue, partially offset by lower cost of sales as a percentage of restaurant revenue. •Net loss was$6.2 million for the twelve weeks endedOctober 4, 2020 compared to net loss of$1.8 million for the twelve weeks endedOctober 6, 2019 . Diluted loss per share was$0.40 for the twelve weeks endedOctober 4, 2020 , as compared to diluted loss per share of$0.14 for the twelve weeks endedOctober 6, 2019 . Excluding costs per diluted share included in Other charges (gains) of$0.19 for restaurant closure and refranchising costs and$0.02 for COVID-19 related costs, adjusted loss per diluted share for the twelve weeks endedOctober 4, 2020 , was$0.19 . Excluding a gain per diluted share included in Other charges (gains) of$0.23 for lease terminations for previously closed restaurants, and costs per diluted share included in Other charges (gains) of$0.07 for board and stockholder matters costs,$0.04 for severance and executive transition, and$0.02 for executive retention, adjusted loss per diluted share for the twelve weeks endedOctober 6, 2019 was$0.24 . •Net loss was$236.7 million for the forty weeks endedOctober 4, 2020 compared to net loss of$0.2 million for the forty weeks endedOctober 6, 2019 . Diluted loss per share was$16.98 for the forty weeks endedOctober 4, 2020 , as compared to diluted loss per share of$0.02 for the forty weeks endedOctober 6, 2019 . Excluding costs per diluted share included in Other charges (gains) of$5.07 for goodwill impairment,$1.10 for restaurant asset impairment,$0.69 for restaurant closure and refranchising costs,$0.24 for litigation contingencies,$0.13 for board and stockholder matters costs,$0.07 for COVID-19 related costs, and$0.04 for severance and executive transition, adjusted loss per diluted share for the forty weeks endedOctober 4, 2020 was$9.64 . Excluding costs per diluted share included in Other charges (gains) of$0.80 for restaurant asset impairment,$0.17 for severance and executive transition,$0.14 for board and stockholder matters costs, and$0.04 for executive retention, and a gain included in Other charges (gains) of$0.15 for lease terminations for previously closed restaurants, adjusted earnings per diluted share for the forty weeks endedOctober 6, 2019 was$0.98 . •We believe the non-GAAP measure of adjusted earnings (loss) 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. Our media buying approach has pivoted to prioritize digital, social, and owned channels including our website and email to effectively target and reach our Guests. 16 -------------------------------------------------------------------------------- Table of Contents Restaurant Data The following table details restaurant unit data for our Company-owned and franchised locations for the periods indicated: Twelve Weeks Ended Forty Weeks Ended October 4, 2020 October 6, 2019 October 4, 2020 October 6, 2019 Company-owned: Beginning of period 450 472 454 484 Opened during the period - 1 - - Closed during the period(1) (6) (2) (10) (13) End of period 444 471 444 471 Franchised: Beginning of period 102 90 102 89 Opened during the period 1 - 1 1 End of period 103 90 103 90 Total number of restaurants 547 561 547 561
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(1) In addition to the permanent closures during the twelve and forty weeks endedOctober 4, 2020 , 24 Company-owned restaurants remained temporarily closed due to the COVID-19 pandemic as ofOctober 4, 2020 . Of the 35 temporarily closed Company-owned restaurants at the beginning of the third fiscal quarter, six restaurants have been reopened and five restaurants have been permanently closed during the twelve weeks endedOctober 4, 2020 . Additionally, six more temporarily closed Company-owned restaurants were reopened during the beginning of our fourth fiscal quarter. 17 -------------------------------------------------------------------------------- Table of Contents 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. Twelve Weeks Ended Forty Weeks Ended October 4, 2020 October 6, 2019 October 4, 2020 October 6, 2019 Revenues: Restaurant revenue 98.3 % 98.5 % 98.6 % 98.1 % Franchise and other revenues 1.7 1.5 1.4 1.9 Total revenues 100.0 100.0 100.0 100.0 Costs and expenses: Restaurant operating costs (exclusive of depreciation and amortization shown separately below): Cost of sales 23.4 23.8 23.6 23.7 Labor 37.7 36.2 38.8 35.7 Other operating 19.1 15.3 18.9 14.4 Occupancy 11.2 8.6 11.6 8.6 Total restaurant operating costs 91.4 83.9 92.9 82.4 Depreciation and amortization 9.6 7.2 10.2 7.0 Selling, general and administrative 10.6 12.5 12.4 11.8 Pre-opening and acquisition costs - - - - Other charges (gains) 2.2 (0.6) 20.7 1.7 Loss from operations (12.3) (1.8) (35.0) (1.4) Interest expense, net and other 1.1 0.6 1.1 0.7 Loss before income taxes (13.4) (2.4) (36.1) (2.2) Income tax benefit (10.3) (1.8) (0.6) (2.1) Net loss (3.1) % (0.6) % (35.5) % - %
___________________________________
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
Twelve Weeks Ended Forty Weeks Ended
October 4, October 6, Percent October 4, Percent
(Revenues in thousands) 2020 2019 Change 2020 October 6, 2019 Change
Restaurant revenue $ 197,009 $ 289,862 (32.0) % $ 658,587 $ 992,764 (33.7) %
Franchise royalties, fees and
other revenue 3,469 4,360 (20.4) % 9,078 19,305 (53.0) %
Total revenues $ 200,478 $ 294,222 (31.9) % $ 667,665 $ 1,012,069 (34.0) %
Average weekly net sales volumes
in Company-owned restaurants $ 39,418 $ 51,221 (23.0) % $ 38,352 $ 51,961 (26.2) %
Total operating weeks 4,998 5,659 (11.7) % 17,172 19,106 (10.1) %
Net sales per square foot $ 75 $ 98 (23.1) % $ 247 $ 334 (26.2) %
Restaurant revenue for the twelve weeks ended October 4, 2020 , which comprises
primarily food and beverage sales, decreased $92.9 million , or 32.0%, as
compared to the third quarter of 2019. The decrease was due to a $65.7 million ,
or 25.1%, decrease in comparable restaurant revenue and a $27.2 million decrease
primarily from closed restaurants. The comparable restaurant revenue decrease
was driven by a 24.6% decrease in Guest count and a 0.5% decrease in average
Guest check. The decrease in average Guest check resulted from a 3.6% decrease
in menu mix, partially offset by a 2.2% increase in pricing and a 0.9% increase
from lower discounting. The decrease in menu mix was primarily driven by limited
dining room capacity at reopened restaurants and operating off-premise only at
restaurants with temporarily closed dining rooms, resulting in lower sales of
beverages and Finest burgers. Off-premise sales increased 127.2% and comprised
40.7% of total food and beverage sales during the third quarter of 2020.
Restaurant revenue for the forty weeks ended October 4, 2020 , decreased $334.2
million or 33.7%, as compared to the forty weeks ended October 6, 2019 . The
decrease was due to a $252.1 million , or 28.3%, decrease in comparable
restaurant revenue and a $82.1 million decrease primarily from closed
restaurants. The comparable restaurant revenue decrease was driven by a 27.4%
decrease in Guest count and a 0.9% decrease in average Guest check. The decrease
in average Guest check resulted from a 3.5% decrease in menu mix, partially
offset by a 2.0 % increase in pricing and a 0.6 % increase from lower
discounting. The decrease in menu mix was primarily driven by limited dining
room capacity at reopened restaurants and operating off-premise only at
restaurants with temporarily closed dining rooms, resulting in lower sales of
beverages and Finest burgers. Off-premise sales increased 136.8% and comprised
40.0% of total food and beverage sales during the forty weeks ended October 4,
2020 .
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 at the end of each
period presented. The temporarily closed Company-owned restaurants due to the
COVID-19 pandemic were not included in the comparable base for the twelve and
forty weeks ended October 4, 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 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 $0.9 million for the twelve weeks ended
October 4, 2020 compared to the twelve weeks ended October 6, 2019 due to
charging and collecting partial royalty payments and advertising contributions
from our franchisees for the majority of the third fiscal quarter of 2020. As of
the end of our third fiscal quarter of 2020, we were charging and collecting
full royalty payments and advertising contributions from our franchisees. Our
franchisees reported a comparable restaurant revenue decrease of 17.0% for the
twelve weeks ended October 4, 2020 compared to the same period in 2019.
Franchise and other revenue decreased $10.2 million for the forty weeks ended
October 4, 2020 compared to the forty weeks ended October 6, 2019 due to the
temporary abatement of franchisee royalty payments and advertising contributions
in response to COVID-19's effect on our franchise operations through the latter
half of the second fiscal quarter and only charging and collecting partial
royalty payments and advertising contributions thereafter through the majority
of the third fiscal quarter of 2020. As of the end of the third quarter of 2020,
the Company had resumed charging full royalty and advertising contributions to
our franchisees. Our franchisees reported a comparable restaurant revenue
decrease of 27.1% for the forty weeks ended October 4, 2020 compared to the same
period in 2019.
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Cost of Sales
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except
percentages) October 4, 2020 October 6, 2019 Percent Change October 4, 2020 October 6, 2019 Percent Change
Cost of sales $ 46,037 $ 69,017 (33.3) % $ 155,243 $ 235,119 (34.0) %
As a percent of restaurant
revenue 23.4 % 23.8 % (0.4) % 23.6 % 23.7 % (0.1) %
Cost of sales, which comprises of food and beverage costs, is variable and
generally fluctuates with sales volume. Cost of sales as a percentage of
restaurant revenue decreased 40 basis points for the twelve weeks ended
October 4, 2020 as compared to the same period in 2019. The decrease was
primarily driven by lower promotional discounts and net favorable commodity
prices. Cost of sales as a percentage of restaurant revenue decreased 10 basis
points for the forty weeks ended October 4, 2020 as compared to the same period
in 2019. The decrease was mainly driven by lower promotional discounts,
partially offset by increased waste and lower beverage mix.
Labor
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except
percentages) October 4, 2020 October 6, 2019 Percent Change October 4, 2020 October 6, 2019 Percent Change
Labor $ 74,344 $ 104,870 (29.1) % $ 255,652 $ 354,302 (27.8) %
As a percent of restaurant
revenue 37.7 % 36.2 % 1.5 % 38.8 % 35.7 % 3.1 %
Labor costs include restaurant-level hourly wages and management salaries as
well as related taxes and benefits. For the twelve weeks ended October 4, 2020 ,
labor as a percentage of restaurant revenue increased 150 basis points compared
to the same period in 2019. The increase was primarily due to sales deleverage
and higher hourly wage rates driven by shifting labor mix in support of our
off-premise operating model, partially offset by lower restaurant manager
incentive compensation. For the forty weeks ended October 4, 2020 , labor as a
percentage of restaurant revenue increased 310 basis points compared to the same
period in 2019. The increase was primarily driven by sales deleverage and higher
hourly wage and benefit rates driven by shifting labor mix in support of our
off-premise operating model, partially offset by lower restaurant manager
incentive compensation.
Other Operating
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except
percentages) October 4, 2020 October 6, 2019 Percent Change October 4, 2020 October 6, 2019 Percent Change
Other operating $ 37,631 $ 44,317 (15.1) % $ 124,585 $ 142,882 (12.8) %
As a percent of restaurant
revenue 19.1 % 15.3 % 3.8 % 18.9 % 14.4 % 4.5 %
Other operating costs include costs such as equipment repairs and maintenance
costs, restaurant supplies, utilities, restaurant technology, and other
miscellaneous costs. For the twelve weeks ended October 4, 2020 , other operating
costs as a percentage of restaurant revenue increased 380 basis points as
compared to the same period in 2019. The increase was primarily due to higher
third-party delivery fees and supply costs driven by higher off-premise sales
volumes and sales deleverage impacts on restaurant utility costs, partially
offset by a decrease in restaurant janitorial and maintenance costs. For the
forty weeks ended October 4, 2020 , other operating costs as a percentage of
restaurant revenue increased 450 basis points as compared to the same period in
2019. The increase was primarily due to higher third-party delivery fees driven
by higher off-premise sales volumes and sales deleverage impacts on restaurant
supply, utility, and technology costs, partially offset by a decrease in
restaurant maintenance costs.
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Occupancy
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except
percentages) October 4, 2020 October 6, 2019 Percent Change October 4, 2020 October 6, 2019 Percent Change
Occupancy $ 22,099 $ 24,942 (11.4) % $ 76,514 $ 85,420 (10.4) %
As a percent of restaurant
revenue 11.2 % 8.6 % 2.6 % 11.6 % 8.6 % 3.0 %
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 twelve weeks ended October 4, 2020 ,
occupancy costs as a percentage of restaurant revenue increased 260 basis points
compared to the same period in 2019 primarily due to sales deleverage. For the
forty weeks ended October 4, 2020 , occupancy costs as a percentage of restaurant
revenue increased 300 basis points compared to the same period in 2019 primarily
due to sales deleverage.
Our fixed rents for the twelve weeks ended October 4, 2020 and October 6, 2019
were $14.7 million and $16.9 million , a decrease of $2.2 million due to
permanent restaurant closures. Our fixed rents for the forty weeks ended
October 4, 2020 and October 6, 2019 were $51.0 million and $57.1 million , a
decrease of $6.1 million due to permanent restaurant closures.
Depreciation and Amortization
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except
percentages) October 4, 2020 October 6, 2019 Percent Change October 4, 2020 October 6, 2019 Percent Change
Depreciation and
amortization $ 19,173 $ 21,280 (9.9) % $ 68,053 $ 71,087 (4.3) %
As a percent of total
revenues 9.6 % 7.2 % 2.4 % 10.2 % 7.0 % 3.2 %
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 twelve week
periods ended October 4, 2020 , depreciation and amortization expense as a
percentage of revenue increased 240 basis points over the same period in 2019
primarily due to sales deleverage. For the forty weeks ended October 4, 2020 ,
depreciation and amortization expense as a percentage of revenue increased 320
basis points over the same period in 2019 primarily due to sales deleverage.
Selling, General, and Administrative
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except
percentages) October 4, 2020 October 6, 2019 Percent Change October 4, 2020 October 6, 2019 Percent Change
Selling, general, and
administrative $ 21,284 $ 36,776 (42.1) % $ 82,483 $ 120,126 (31.3) %
As a percent of total
revenues 10.6 % 12.5 % (1.9) % 12.4 % 11.8 % 0.6 %
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 twelve weeks ended October 4,
2020 decreased $15.5 million , or 42.1%, as compared to the same period in 2019.
The decrease was primarily due to decreased national and local media spend,
decreased Team Member salaries and wages resulting from the reduction in force
and temporary salary reductions, and decreased Team Member benefits, travel and
entertainment, and gift card related costs. For the forty weeks ended October 4,
2020 , selling, general, and administrative costs decreased $37.6 million , or
31.3%, as compared to the same period in 2019. The decrease was primarily
related to a decrease in national and local media spend, decreased Team Member
salaries and wages resulting from the reduction in force and temporary salary
reductions, and decreased Team Member benefits, travel and entertainment, gift
card related, professional services, and project related general and
administrative costs.
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Pre-opening Costs
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except
percentages) October 4, 2020 October 6, 2019 Percent Change October 4, 2020 October 6, 2019 Percent Change
Pre-opening costs $ 89 $ - - % $ 245 $ 319 (23.2) %
As a percent of total
revenues - % - % - % - % - % - %
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 pre-opening costs during the twelve and forty weeks ended October 4,
2020 related to the rollout of Donatos®. The limited rollout of Donatos® planned
in the Seattle market during 2020 was completed on October 16, 2020 . The Company
expects to resume its phased system-wide rollout of Donatos® in 2021.
Interest Expense, Net and Other
Interest expense, net and other was $2.3 million for the twelve weeks ended
October 4, 2020 , an increase of $0.5 million , or 27.8%, compared to the same
period in 2019. The increase was primarily related to a higher average
outstanding debt balance compared to the same period in 2019. Our weighted
average interest rate was 5.0% for the twelve weeks ended October 4, 2020 as
compared to 5.1% for the same period in 2019.
Interest expense, net and other was $7.6 million for the forty weeks ended
October 4, 2020 , an increase of $0.4 million , or 5.6%, compared to the same
period in 2019. The increase was primarily related to a higher 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
4.5% for the forty weeks ended October 4, 2020 as compared to 5.0% for the same
period in 2019.
Provision for Income Taxes
The effective tax rate for the twelve weeks ended October 4, 2020 was a 77.0%
benefit, compared to a 74.1% benefit for the twelve weeks ended October 6, 2019 .
The effective tax rate for the forty weeks ended October 4, 2020 was a 1.8%
benefit, compared to a 99.1% benefit for the same period in 2019. The increase
in tax benefit for the twelve weeks ended October 4, 2020 is primarily due to a
decrease in income and the release of $12.7 million in a previously recognized
valuation allowance. The decrease in tax benefit for the forty weeks ended
October 4, 2020 is primarily due to a $67.1 million net valuation allowance and
decrease in current year tax credits, partially offset by a decrease in income
and the favorable rate impact of net operating loss ("NOL") carrybacks allowed
as part of the CARES Act. Subsequent to its third quarter balance sheet date,
the Company received $49.4 million in cash tax refunds, including interest, and
expects to receive between $12 million to $15 million of additional cash tax
refunds within the next 12 months.
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Liquidity and Capital Resources Cash and cash equivalents decreased$2.7 million to$27.4 million atOctober 4, 2020 , from$30.0 million at the beginning of the fiscal year. As the Company has now stabilized its liquidity through its at-the-market equity offering, reduced overhead costs, and federal cash tax refunds provided under the provisions of the CARES Act, we expect to begin using available cash flow from operations to pay down debt, maintain existing restaurants and infrastructure, and execute on our long-term strategic initiatives. As ofOctober 4, 2020 , the Company had approximately$97 million in liquidity, including cash on hand and available borrowing capacity under its credit facility. Our liquidity as ofOctober 4, 2020 does not include$49.4 million in cash tax refunds, including interest, which were received after the third quarter balance sheet date. Cash Flows The table below summarizes our cash flows from operating, investing, and financing activities for each period presented (in thousands):
Forty Weeks Ended
2020 2019
Net cash (used in) provided by operating activities $ (22,401) $ 41,617
Net cash used in investing activities (14,131) (32,900)
Net cash provided by (used in) financing activities 34,020 (7,156)
Effect of exchange rate changes on cash (166) 81
Net change in cash and cash equivalents $
(2,678)
Operating Cash Flows Net cash flows (used in) provided by operating activities decreased$64.0 million to$22.4 million for the forty weeks endedOctober 4, 2020 . The changes in net cash (used in) provided by operating activities are primarily attributable to a$110.4 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$18.8 million to$14.1 million for the forty weeks endedOctober 4, 2020 , as compared to$32.9 million for the same period in 2019. The decrease is primarily due to decreased investment in restaurant technology, restaurant maintenance, and new restaurants and restaurant refreshes due to the COVID-19 pandemic. The following table lists the components of our capital expenditures, net of currency translation effect, for the forty weeks endedOctober 4, 2020 andOctober 6, 2019 (in thousands): Forty Weeks Ended October 6, October 4, 2020 2019 Restaurant maintenance capital and other $ 8,433$ 13,128 Investment in technology infrastructure and other 6,437 16,832 Restaurant remodels - 3,118 Total capital expenditures $ 14,870$ 33,078 Financing Cash Flows Net cash flows provided by (used in) financing activities increased$41.2 million to$34.0 million for the forty weeks endedOctober 4, 2020 , as compared to the same period in 2019. The increase is due to cash proceeds received from the issuance of common stock, net of cash paid for stock issuance costs, of$28.9 million , a$14.4 million increase in net draws made on long-term debt, and a decrease in cash used to repurchase the Company's common stock due to temporary suspension of the share repurchase program. The increase was partially offset by an increase of cash used for debt issuance costs. The net cash proceeds from issuance of common stock of$28.9 million do not include unpaid stock issuance costs of approximately$0.2 million . 23 -------------------------------------------------------------------------------- Table of Contents Credit Facility As ofOctober 4, 2020 , the Company had outstanding borrowings under the credit facility of$215.2 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 ofOctober 4, 2020 , the Company had$69.6 million of available borrowing capacity under its credit facility. Net draws during the third quarter of 2020 totaled$8.6 million , and net draws during the forty weeks endedOctober 4, 2020 totaled$9.2 million . 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. During the first quarter of 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 ("LALR ratio") and fixed charge coverage ratio financial covenant ("FCC ratio") for the remainder of fiscal 2020 and allows adjustments during the first three fiscal quarters of 2021 to the LALR ratio, including increasing the maximum LALR ratio permitted and allowing the use of a seasonally adjusted annualized consolidated EBITDA in the LALR ratio calculation, and to the FCC ratio, including only being calculated for applicable periods since the beginning of 2021. Debt Outstanding Total debt outstanding increased$9.2 million to$216.1 million atOctober 4, 2020 , from$206.9 million atDecember 29, 2019 , due to net draws of$9.2 million on the credit facility during the forty weeks endedOctober 4, 2020 . In conjunction with the receipt of$49.4 million in cash tax refunds subsequent to the third quarter balance sheet date, the Company made a$42 million repayment on its credit facility onOctober 30, 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 as allowed. 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. 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 throughOctober 4, 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 ofOctober 4, 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 or (b) the Company satisfying an agreed ratio under its Leverage Ratio Covenant for the most recently ended fiscal quarter or fiscal year, as applicable. 24 -------------------------------------------------------------------------------- Table of Contents 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 forty weeks endedOctober 4, 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. Contractual Obligations There were no other material changes outside the ordinary course of business to our contractual obligations since the filing of Company's Quarterly Report on Form 10-Q for the fiscal quarter endedApril 19, 2020 , except for lease obligations as a result of contractual rent concessions negotiated by the Company during the fiscal quarters endedJuly 12, 2020 andOctober 4, 2020 . See the maturity of lease liabilities table in Note 4, Leases, in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. 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 in Part I, Item 1 of this Quarterly Report on Form 10-Q. 25 -------------------------------------------------------------------------------- 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 statements regarding: our financial performance, improved sales trajectory, Guest satisfaction scores, seating expansion and increased dining capacity and its effect on sales, strategic plan and turnaround, marketing strategy, expected uses for available cash flow; 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, liquidity, projected taxes and cash tax refunds; the anticipated effects of inflation on labor and commodity costs; future performance including sales and off premise sales; preliminary results including net comparable restaurant revenues and average weekly net sales per restaurant; expectations regarding dining room re-openings and closures; anticipated additional rollout ofDonato's ® and the timing thereof; statements under the heading "Company Response to COVID-19 Pandemic;" 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 rapidly evolving nature of the COVID-19 pandemic and related containment measures, including the potential for a complete shutdown of Company restaurants; the extent of the impact of the COVID-19 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 COVID-19 related government orders and restrictions, including inCalifornia where a substantial number of our restaurants are located; economic, public health, and political conditions that impact consumer confidence and spending, including the impact of COVID-19; the effect of the COVID-19 pandemic on labor, staffing, and 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, suppliers, licensees, vendors, and other third parties providing goods or services to the Company; the Company's ability to continue to implement our seating expansion plans and the timing thereof, including factors that are under control of government agencies, landlords, and other third parties; adverse weather conditions in regions in which the Company's restaurants are located and the timing thereof; the impact of political protests and curfews imposed by state and local governments; the effect of COVID-19 on our supply chain and the cost, availability, and timing of obtaining key products, distribution, labor, and energy; the effectiveness of the Company's marketing and menu strategies and promotions; the effectiveness of the Company's strategic initiatives including service model, technology solutions, and sales building initiatives; the amount and timing of cash tax refunds received as a result of the CARES Act; 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; 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; 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; changes in accounting standards policies and practices or related interpretations by auditors or regulatory entities; 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. 26
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