RED ROBIN GOURMET BURGERS, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations provides a narrative of our financial performance and condition that should be read in conjunction with the accompanying consolidated financial statements. All comparisons under this heading between 2020 and 2019 refer to the fifty-two weeks endedDecember 27, 2020 andDecember 29, 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 casual dining restaurants with 546 locations inNorth America . As ofDecember 27, 2020 , the Company operated 443 Company-owned restaurants located in 38 states. The Company also had 103 franchised casual dining restaurants in 16 states and one Canadian province as ofDecember 27, 2020 . The Company operates its business as one operating and one reportable segment. Our primary source of revenue is from the sale of food and beverages at Company-owned restaurants. We also earn revenue from royalties and fees from franchised restaurants. The Company's fiscal year ends on the last Sunday of each calendar year. Most of our fiscal years have 52 weeks; however, we experience a 53rd week once every five to six years. Both 2020 and 2019 refer to 52 week fiscal years. Fiscal Year 2020 Accomplishments Despite the COVID-19 pandemic, we made significant progress on our transformation strategy during fiscal year 2020 to solidify our financial longevity and develop a more robust enterprise business model. Our accomplishments in 2020 include the following: •Significantly grew off-premise sales, which more than doubled over the prior year; •Continued Donatos® roll-out, in 79 restaurants as ofDecember 27, 2020 ; •Structurally improved restaurant and enterprise-level margin for the long-term compared to 2019; •Reduced our menu by over one-third, improving operational execution and resulting in over$2 million in annual savings; •Implemented new management labor structure which provides better supervisory coverage during peak hours and increases flexibility resulting in approximately$14 million in annual savings excluding labor savings associated with closed restaurants; •Optimized our portfolio by completing lease negotiations for more than 75% of Company-owned restaurants resulting in 3% to 4% in occupancy expense savings over the remaining lease terms, as well as permanently closing select restaurants; and •Drove a permanent annual reduction in general and administrative expenses by more than 10%, or approximately$10 million , prior to future growth drivers and other inflationary costs. •Reduced costs are expected to result in permanent incremental enterprise-level margin improvement of more than 100 basis points, as the Company returns to pre-COVID sales volumes; •Implemented our TGX hospitality model, which combines technology and improved service coverage to deliver an elevated and more attentive Guest experience. TGX improved speed of service (including decreased ticket and window times), increased cleanliness scores, and contributed to highest ever product quality and overall Guest satisfaction scores; and •Increased web traffic to drive a record number of Guests to our website, as well as increased social media engagement and a new high in total followers. 26 -------------------------------------------------------------------------------- Tabl e of Contents Company Response to COVID-19 Pandemic Due to the COVID-19 pandemic, we continue to navigate an unprecedented time for our business and industry. The COVID-19 pandemic has had a material adverse effect on our business, and we expect the impact from COVID-19 will continue to negatively affect our business. During 2020, the Company experienced dining room closures and indoor dining capacity limitations in accordance with local public health orders based on fluctuating COVID-19 cases during the year, particularly in our key states ofCalifornia ,Colorado ,Oregon , andWashington that implemented more strict indoor dining restrictions. 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. We remain focused on expanding indoor and outdoor seating capacity, retaining higher off-premise sales levels compared to pre-COVID-19 levels, and consistently delivering a great Guest experience to continue to drive our improving sales. As dining rooms reopen, we expect to build sales momentum from additional seating expansion, including use of outdoor all-weather tents and indoor booth and other partitions. We continue to require Team Members to wear face coverings at all times and Guests to wear face coverings while entering, exiting, and walking around our restaurants. Face masks are provided for Guests who arrive without one to ensure we are enabling the mutual safety of our Guests and Team Members. Enhanced health and safety protocols remain in place across the business, including social distancing, face mask rules, daily symptom checks at the restaurants, emergency sick pay for hourly Team Members, and telecommuting policies for nearly all restaurant support center Team Members. Sales and the Guest experience have been positively impacted by the accelerated implementation of our new 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. Our new TGX hospitality model combines technology and improved service coverage to deliver an elevated and more attentive Guest experience. TGX improved speed of service (including decreased ticket and window times), increased cleanliness scores, and contributed to highest ever product quality and overall Guest satisfaction scores. TGX enables our servers to stay in their section the majority of the time to engage with Guests while server partners deliver food, beverages, refills, and clear dishes. The use of handheld point-of-sale devices is critical to sending food orders to our kitchens and beverage orders to our server partners, ensuring speed of service, high quality food, and more attentive beverage and bottomless refills. Additionally, we are particularly focused on our ability to execute a great off-premise experience. We have put in place process and technology enhancements which streamlined and reduced friction in the ordering process, improved the accuracy of promise times for order pick-up and delivery, reinforced a triple check accuracy program ensuring every order goes through three checks before being handed to the Guest, added more convenient order pick up options, and dedicated assembly workspaces that can expand during peak periods. With these measures in place, we are confident that we are delivering an elevated casual dining experience that differentiatesRed Robin from the competition. We secured the Company's liquidity position through our at-the-market equity offering resulting in net proceeds of$28.7 million , reductions in costs as discussed above, receipt of a$49.4 million federal cash tax refund, including interest, provided under provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), and approximately$16 million of additional federal cash tax refunds expected to be received in 2021. Additionally, under provisions of the CARES Act, we are deferring approximately$18 million in payroll taxes to be paid in fiscal years 2022 and 2023. The Company took additional actions during 2020 to improve liquidity and enhance financial flexibility in response to the COVID-19 pandemic, which enabled us to make significant progress on our transformation strategy as outlined above. These actions included temporarily reducing executive base salaries, Board member cash retainer fees, restaurant support center and non-furloughed restaurant supervisory Team Members wages and salaries by 20%, eliminating more than 50 restaurant support center general and administrative positions, postponing or eliminating all non-essential spend, suspending stock repurchases, temporarily halting full lease payments, and engaging in constructive discussions with landlords to achieve restructuring of lease agreements, as well as rent and other concessions. We believe the actions we have taken in response to COVID-19 will be sufficient to fund our lease obligations, capital expenditures, and working capital needs for the next 12 months and foreseeable future. As ofFebruary 21, 2021 , the Company had approximately$122 million of liquidity, including cash on hand and available borrowing capacity under the credit facility. This liquidity amount includes the impact of a cash payment of$8.5 million paid during the first quarter of 2021 related to a class action settlement of legal matters originally filed in 2017. Although franchisees have had to restrict dining room capacity and close indoor dining rooms as a result of state and local public health orders at various times throughout the year, as ofDecember 27, 2020 , the majority of our franchisees' restaurants indoor dining rooms were open, and all of our franchisees' restaurants were open for off-premise. 27 -------------------------------------------------------------------------------- Tabl e of Contents As ofFebruary 28, 2021 , the Company had 372 total (comparable and non-comparable) indoor dining rooms reopened with limited capacity, representing approximately 87% of currently open Company-owned restaurants. Notably, these restaurants have on average maintained off-premise sales that are more than two times what we generated before the pandemic after reopening dining rooms. As ofFebruary 28, 2021 , 12 restaurants remained temporarily closed due to the COVID-19 pandemic. Of the 35 Company-owned restaurants initially closed due to the pandemic, 17 restaurants have been reopened and six restaurants have been permanently closed as ofFebruary 28, 2021 . 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; see Note 5, Other Charges, in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. 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 through the second period of fiscal year 2021 and the most recent week endedFebruary 28, 2021 are as follows: Period Ended(2) Reopened Company-owned Restaurant 1-Nov 29-Nov 27-Dec 24-Jan 21-Feb(4) 28-Feb(5) Indoor Dining Rooms(3) Net comparable restaurant revenues (13.7)% (20.7)% (23.3)% (8.1)% (16.3)% (9.1)% Average weekly net sales per restaurant$42,778 $39,041 $40,578 $44,354 $41,998 $51,150 Number of comparable Company-owned 362 245 236 299 354 360 restaurants(1) ------------------- (1) Net sales performance for Company-owned restaurants with reopened indoor dining rooms for the full period presented. Restaurant count shown is as of the end of the period presented. (2) The periods endedNovember 1 ,November 29 , andDecember 27, 2020 comprise the Company's fourth fiscal quarter. The periods endedJanuary 24, 2021 andFebruary 21, 2021 , and the week endedFebruary 28, 2021 , fall within our first fiscal quarter of 2021, and amounts presented for the periods are preliminary and subject to closing adjustments. The first fiscal quarter of 2021 is comprised of the four accounting periods endedApril 18, 2021 . (3) Sales performance was negatively impacted in the fourth quarter of 2020 by rising COVID-19 cases resulting in new restrictions lowering or suspending dining room capacity and full restaurant closures being concentrated in our highest performing states ofCalifornia ,Colorado ,Oregon , andWashington . Additionally, the prior year sales amounts in the comparable base included higher holiday season sales volume. (4) Period includes the impact of reduced traffic due to winter weather in February of approximately 2% to 3%. Results for this period also include the impact of reopening indoor dining rooms in jurisdictions that require lower capacity than the existing base of restaurants. (5) Period represents the results of the first week of our third fiscal period. Net comparable restaurant revenue and average weekly net sales per Company-owned restaurant for the Company's 28 day accounting periods through the second period of fiscal year 2021 and the most recent week endedFebruary 28, 2021 are as follows: Period Ended(2) Company-owned Restaurants(3) 1-Nov 29-Nov 27-Dec 24-Jan 21-Feb(4) 28-Feb(5) Net comparable restaurant revenues (15.4)% (28.8)% (39.5)% (27.0)% (22.4)% (13.3)% Average weekly net sales per restaurant$42,509 $38,941 $35,716 $39,702 $41,624 $50,226 Number of comparable Company-owned 412 412 412 413 411 411 restaurants(1) ------------------- (1) Comparable restaurants are those Company-owned restaurants that have operated five full fiscal quarters as of the period presented. Restaurant count is as of the end of the period presented. (2) The periods endedNovember 1 ,November 29 , andDecember 27, 2020 comprise the Company's fourth fiscal quarter. The periods endedJanuary 24, 2021 andFebruary 21, 2021 , and the week endedFebruary 28, 2021 , fall within our first fiscal quarter of 2021, and amounts presented for the periods are preliminary and subject to closing adjustments. The first fiscal quarter of 2021 is comprised of the four accounting periods endedApril 18, 2021 . (3) Sales performance was negatively impacted in the fourth quarter of 2020 by rising COVID-19 cases resulting in new restrictions lowering or suspending dining room capacity and full restaurant closures being concentrated in our highest performing states ofCalifornia ,Colorado ,Oregon , andWashington . Additionally, the prior year sales amounts in the comparable base included higher holiday season sales volume. (4) Period includes the impact of reduced traffic due to winter weather in February of approximately 2% to 3%. Results for this period also include the impact of reopening indoor dining rooms in jurisdictions that require lower capacity than the existing base of restaurants. (5) Period represents the results of the first week of our third fiscal period. We expect to see continued benefits from outdoor seating expansion of approximately 16 to 24 incremental seats where jurisdictions and weather allow. Our outdoor seating expansions have added approximately 10% total capacity to restaurants with expanded outdoor seating. We are encouraged by the positive trends in revenues and dining room openings in early 2021 as states have begun loosening indoor dining restrictions and COVID-19 vaccines have started to become more available. These factors along with our business growth initiatives planned for 2021 and the improvements made to our business during 2020 have put the foundation in place to create sustainable long-term value as we move into a post-pandemic operating environment. 28 -------------------------------------------------------------------------------- Tabl e of Contents We believe Donatos® will generate annual Company pizza sales of more than$60 million and profitability of more than$25 million by 2023, when we expect to have completed our rollout to approximately 400 Company-owned restaurants. In 2021, we plan to add Donatos® to approximately 120 restaurants bringing the total number of Company-owned restaurants that offer Donatos® to approximately 200 by the end of the year. We expect restaurants with Donatos® to drive incremental flow-through of$45 thousand in the second year, yielding a three to four year payback period. First year startup costs include pre-opening expense of$12 thousand , required first year marketing investments of$30 thousand , and capital of$145 thousand per restaurant. As we look ahead to a post-pandemic operating environment, we are preparing our Team Members with a "Ready-Set-Reopen" training playbook to ensure a great experience as our Guests return to our dining rooms. This prescriptive guide addresses short, medium, and long term actions required to continue building satisfaction with our Guests and guides best practices for resuming the operation of our indoor dining rooms at 100% capacity. We also have several technology solutions we plan to roll out in late 2021, including website enhancements and a newRed Robin mobile app. These initiatives are cost-effective channels to engage on a direct and personalized level with our Guests. Our technology platforms are expected to grow revenue through higher order conversion and increased Guest frequency, while driving additional Royalty™ participation. Additionally our new loyalty platform will allow us to better segment our Guests and target marketing campaigns in a more meaningful way. Our off-premise execution enhancements support our ability to retain off-premise food and beverage sales of more than twice pre-pandemic levels while operating at 100% indoor capacity. In the fourth quarter of 2019, off-premise sales comprised approximately 14% of total food and beverage sales. Financial and Operational Highlights The following summarizes the financial and operational highlights during the fifty-two weeks endedDecember 27, 2020 : •Restaurant revenue decreased$435.4 million , or 33.8%, to$854.1 million in 2020, as compared to 2019, due to a$330.1 million , or 28.5%, decrease in comparable restaurant revenue and a$105.3 million decrease from permanently closed restaurants. •Restaurant operating costs, as a percentage of restaurant revenue, increased 1,110 basis points to 93.2% in 2020, as compared to 82.1% in 2019 primarily due to sales deleverage partially offset by savings initiatives. Overall, the increase in restaurant operating costs as a percentage of restaurant revenue included a 480 basis point increase in other operating costs, a 360 basis point increase in labor costs, and a 300 basis point increase in occupancy costs, partially offset by a 30 basis point decrease in cost of sales. •Net loss was$276.1 million in 2020 compared to net loss of$7.9 million in 2019. Diluted loss per share was$19.29 in 2020, as compared to diluted loss per share of$0.61 in 2019. Excluding costs per diluted share included in Other charges of$4.94 for goodwill impairment,$1.39 for restaurant asset impairment,$1.03 for restaurant closure and refranchising costs,$0.33 for litigation contingencies,$0.13 for board and stockholder matters costs,$0.10 for COVID-19 related costs, and$0.04 for severance and executive transition, adjusted loss per diluted share in 2020 was$11.33 . Excluding costs per diluted share of$0.86 for restaurant asset impairment,$0.19 for board and stockholder matter costs,$0.19 for severance and executive transition,$0.06 for executive retention, and a gain of$0.07 for restaurant closure and refranchising, adjusted earnings per diluted share in 2019 was$0.62 . •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 our Company-ownedRed Robin restaurants and has been rolled out to most of our franchised restaurants. We engage our Guests through Red Robin Royalty™ which allows for increased segmentation and more precise targeting of offers designed to increase frequency of visits as a key part of our overall marketing strategy. Our media buying approach prioritizes digital, social, and owned channels including our website and email to effectively target and reach our Guests. 29 -------------------------------------------------------------------------------- Tabl e of Contents 2021 Outlook The Company provides guidance as it relates to selected information related to the Company's financial and operating performance, and such measures may differ from year to year. Due to the uncertainty caused by the on-going COVID-19 pandemic, limited guidance is being provided for fiscal year 2021. The Company currently expects the following in 2021: •We expect that the recovery of our Western markets which represent a meaningful portion of our portfolio, pent up demand for casual dining, higher average Guest check with increasing on-premise dining, and industry restaurant closures will drive significant comparable restaurant revenue growth in 2021. •We also currently expect that the combination of enterprise pricing, outdoor seating capacity expansions, restoration of full operating hours, and Donatos® expansion will generate incremental growth of mid-to-high single digit comparable restaurant revenue in 2021 beyond the benefits associated with the recovery; and •We expect capital expenditures of$45 million to$55 million , including continued investment in maintaining our restaurants and infrastructure with maintenance and systems capital, Donatos® expansion to approximately 120 restaurants, digital guest and operational technology solutions, and off-premise execution enhancements. Restaurant Data
The following table details restaurant unit data for our Company-owned and franchised locations for the periods indicated:
Year Ended
December 27, 2020 December 29, 2019
Company-owned:
Beginning of period 454 484
Sold to franchisee(2) - (12)
Closed during the period(1) (11) (18)
End of period 443 454
Franchised:
Beginning of period 102 89
Opened during the period 1 1
Acquired from corporate(2) - 12
End of period 103 102
Total number of restaurants 546 556
-------------------
(1) In addition to the permanent closures during 2020, 12 Company-owned
restaurants that remained closed due to the COVID-19 pandemic as of December 27,
2020 may be reopened in 2021.
(2) During the fourth quarter of 2019, the Company sold 12 restaurants located
in British Columbia, Canada to a franchisee.
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The following table presents total Company-owned and franchised restaurants by
state or province as of December 27, 2020 :
Company-Owned Restaurants(1) Franchised Restaurants
State:
Arkansas 2 2
Alaska - 3
Alabama 4 -
Arizona 18 1
California 64 -
Colorado 22 -
Connecticut - 3
Delaware - 5
Florida 21 -
Georgia 6 -
Iowa 5 -
Idaho 8 -
Illinois 24 -
Indiana 13 -
Kansas - 5
Kentucky 4 -
Louisiana 2 -
Massachusetts 4 3
Maryland 13 -
Maine 2 -
Michigan - 20
Minnesota 4 -
Missouri 8 3
Montana - 2
North Carolina 17 -
Nebraska 4 -
New Hampshire 3 -
New Jersey 12 1
New Mexico 3 -
Nevada 6 -
New York 16 -
Ohio 18 2
Oklahoma 5 -
Oregon 15 5
Pennsylvania 11 21
Rhode Island 1 -
South Carolina 4 -
South Dakota 1 -
Tennessee 11 -
Texas 22 9
Utah 1 6
Virginia 20 -
Washington 38 -
Wisconsin 11 -
Province:
British Columbia - 12
Total 443 103
-------------------
(1) Includes 12 Company-owned restaurants that remained closed due to the
COVID-19 pandemic as of
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Results of Operations
Operating results for each fiscal period presented below are expressed as a
percentage of total revenues, except for the components of restaurant operating
costs, which are expressed as a percentage of restaurant revenue. Certain
percentage amounts in the table below do not total due to rounding as well as
restaurant operating costs being expressed as a percentage of restaurant revenue
and not total revenues.
Year Ended
December 27, 2020 December 29, 2019
Revenues:
Restaurant revenue 98.3 % 98.1 %
Franchise revenue 1.0 1.3
Other revenue 0.7 0.6
Total revenues 100.0 % 100.0 %
Costs and expenses:
Restaurant operating costs(1) (exclusive of depreciation and
amortization shown separately below):
Cost of sales 23.2 % 23.5 %
Labor 39.0 35.4
Other operating 19.3 14.5
Occupancy 11.7 8.7
Total restaurant operating costs 93.2 82.1
Depreciation and amortization 10.1 7.0
Selling, general, and administrative 12.3 11.9
Pre-opening and acquisition costs - -
Other charges 17.7 1.6
Loss from operations (31.7) % (1.0) %
Other expense (income):
Interest expense 1.2 % 0.8 %
Interest (income) and other, net (0.2) (0.1)
Total other expenses 1.0 0.7
Loss before income taxes (32.6) (1.7)
Income tax benefit (0.9) (1.1)
Net loss (31.8) % (0.6) %
-------------------(1) Expressed as a percentage of restaurant revenue rather than total revenue
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Revenues
Year Ended
(Revenues in thousands) 2020
2019 Percent Change
Restaurant revenue $ 854,136 $ 1,289,521 (33.8) %
Franchise revenue 8,853 17,497 (49.4) %
Other revenue 5,726 7,996 (28.4) %
Total revenues $ 868,715 $ 1,315,014 (33.9) %
Average weekly net sales per Company-owned
restaurants $ 38,381 $ 52,193
Total operating weeks 22,254 24,707 (9.9) %
Net sales per square foot $ 320 $ 444 (27.9) %
Restaurant revenue, which comprises primarily food and beverage sales, decreased
$435.4 million in 2020, or 33.8%, as compared to 2019. The decrease was due to a
$330.1 million , or 28.5%, decrease in comparable restaurant revenue due to the
COVID-19 pandemic and a $105.3 million decrease from closed restaurants. The
decrease in comparable restaurant revenue was driven by restaurants operating at
limited occupant capacity for dining rooms that were opened during the pandemic,
off-premise only restaurants with closed dining rooms, or closed restaurants due
to the COVID-19 pandemic. Components of comparable restaurant revenue included a
27.7% decrease in Guest count and a 0.8% decrease in average Guest check. The
decrease in average Guest check comprised a 3.4% decrease in menu mix, partially
offset by a 2.2% increase in pricing and a 0.4% increase from lower discounting.
The decrease in menu mix was primarily driven by lower sales of beverages and
Finest burgers as a result of limited dining room capacity at reopened
restaurants and operating off-premise only at restaurants with closed dining
rooms. Restaurants which offered Donatos® during 2020 outperformed non-Donatos®
restaurants with similar indoor dining restrictions by over 370 basis points in
net comparable restaurant revenue, partially offsetting the decline in
restaurant revenue. Off-premise sales increased 136.2% and comprised 41.1% of
total food and beverage sales in 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 based on operating
five full fiscal quarters as of the end of each period presented. Temporarily
closed Company-owned restaurants due to the COVID-19 pandemic were not included
in the comparable base for the fiscal year ended December 27, 2020 . Fluctuations
in average weekly net sales volumes for Company-owned restaurants reflect the
effect of comparable restaurant revenue changes and changes in dining room
capacity due to the COVID-19 pandemic, and the average square footage of our
restaurants. Net sales per square foot represents the total of restaurant
revenue for Company-owned restaurants included in the comparable base divided by
the total adjusted square feet of Company-owned restaurants included in the
comparable base.
Franchise revenues comprise primarily royalty income and advertising fund
contributions. Franchise revenue decreased $8.6 million , or 49.4%, in 2020
compared to 2019 primarily due to temporary abatement of royalty fees and
advertising contributions from our franchisees and lower revenues at franchisee
restaurants during 2020 as a result of the COVID-19 pandemic. Franchise revenue
was not recognized or collected from our franchisees during periods of
abatement. Our franchisees reported a comparable restaurant revenue decrease of
27.5% during 2020 as compared to 2019.
Other revenue comprises primarily of gift card breakage, which represents the
value associated with the portion of gift cards sold that are unlikely to be
redeemed, and licensing royalties. During 2020 and 2019, we recognized $4.5
million and $6.8 million of gift card breakage.
Cost of Sales
(In thousands, except percentages) 2020 2019 Percent Change
Cost of sales $ 198,487 $ 303,404 (34.6) %
As a percent of restaurant revenue 23.2 % 23.5 % (0.3) %
Cost of sales, which comprises food and beverage costs, is variable and
generally fluctuates with sales channel mix and volume. Cost of sales as a
percentage of restaurant revenue decreased 30 basis points in 2020 as compared
to 2019. The decrease was primarily driven by lower promotional discounts and
favorable contract agreements, partially offset by lower beverage and Finest
burger mix primarily due to higher off-premise sales.
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Labor
(In thousands, except percentages) 2020 2019 Percent Change
Labor $ 332,827 $ 456,778 (27.1) %
As a percent of restaurant revenue 39.0 % 35.4 % 3.6 %
Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits. Labor as a percentage of restaurant revenue increased 360 basis points in 2020 as compared to 2019. The increase was primarily driven by sales deleverage and higher hourly wage and benefit rates driven by shifting labor mix in support of higher off-premise sales, partially offset by temporary salary reductions, the new management labor structure, lower restaurant manager incentive compensation, and restaurant Team Member training costs. Other Operating (In thousands, except percentages) 2020 2019 Percent Change Other operating$ 164,468 $ 186,476 (11.8) % As a percent of restaurant revenue 19.3 % 14.5 %
4.8 %
Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs including royalties paid to Donatos®. Other operating costs as a percentage of restaurant revenue increased 480 basis points in 2020 as compared to 2019. The increase was primarily due higher third party delivery fees driven by higher off-premise sales and sales deleverage impacts on restaurant supply, utility, and technology costs, partially offset by a decrease in restaurant janitorial and maintenance costs and credit card processing fees. Occupancy (In thousands, except percentages) 2020 2019 Percent Change Occupancy$ 99,521 $ 111,798 (11.0) % As a percent of restaurant revenue 11.7 % 8.7 %
3.0 %
Occupancy costs include fixed rents, property taxes, common area maintenance charges, general liability insurance, contingent rents, and other property costs. In 2020, occupancy costs as a percentage of restaurant revenue increased 300 basis points as compared to 2019 primarily due to sales deleverage, partially offset by restaurant closures. Our fixed rents in 2020 and 2019 were$66.1 million and$73.9 million , a decrease of$7.8 million due 11 restaurants permanently closed during 2020, 18 restaurants permanently closed during 2019, and the recognition of occupancy costs in Other charges for the temporarily closed Company-owned restaurants during periods of closure. Depreciation and Amortization (In thousands, except percentages) 2020 2019 Percent Change Depreciation and amortization$ 87,557 $ 91,790 (4.6) % As a percent of total revenues 10.1 % 7.0 %
3.1 %
Depreciation and amortization includes depreciation on capital expenditures for restaurants and corporate assets as well as amortization of acquired franchise rights, leasehold interests, and certain liquor licenses. In 2020, depreciation and amortization expense as a percentage of revenue increased 310 basis points as compared to 2019 primarily due to sales deleverage. Selling, General, and Administrative (In thousands, except percentages) 2020 2019 Percent Change Selling, general, and administrative$ 106,822 $ 155,978 (31.5) % As a percent of total revenues 12.3 % 11.9 %
0.4 %
Selling, general, and administrative costs include all corporate and administrative functions. Components of this category include marketing and advertising costs; corporate, regional, and franchise support salaries and benefits; travel; professional and consulting fees; corporate information systems; legal expenses; office rent; training; and board of directors' expenses.
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Selling, general, and administrative costs decreased $49.2 million , or 31.5% in
2020 as compared to 2019. The decrease was primarily related to a reduction 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 benefit, travel and entertainment, and professional
services costs.
Pre-opening Costs
(In thousands, except percentages) 2020 2019 Percent Change
Pre-opening costs $ 296 $ 319 (7.2) %
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 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 2020 related to the rollout of Donatos®. As ofDecember 27, 2020 , there are 79 Company-owned restaurants serving Donatos®. We plan to continue the rollout to approximately 120 restaurants in 2021 with full completion by 2023. Rollout of Donatos® requires pre-opening expense of$12 thousand per restaurant. Other Charges (In thousands, except percentages) 2020 2019 Percent Change Goodwill impairment$ 95,414 $ - * Asset impairment 26,940 15,094 78.5 % Restaurant closure and refranchising costs (gains) 19,846 (1,187) * Litigation contingencies 6,440 - * Board and stockholder matter costs 2,504 3,261 (23.2) % COVID-19 related costs 1,858 - * Severance and executive transition 881 3,450 (74.5) % Executive retention - 980 * Other charges$ 153,883 $ 21,598
* Percentage increases and decreases over 100 percent were not considered meaningful.
During 2020, the Company recognized$21.7 million of impairment related to restaurant assets included in Asset impairment in Other charges on the consolidated statements of operations and comprehensive loss resulting from the continuing and projected future results of 40 Company-owned restaurants. Although current fiscal year to date results continue to align with management's forecast, the increase in reported COVID-19 cases during the fourth quarter of 2020 acrossthe United States and factors associated with the pandemic have changed management's expectation on the timing of the Company's recovery and projected results in future fiscal periods at certain restaurants. Our restaurant asset impairment assessment is based on inputs subject to various risks and uncertainties caused by the COVID-19 pandemic, including forecasted revenues, expenses, and cash flows, current discount rates, growth rates, observable market data, and changes to the regulatory environment. If reported COVID-19 cases increase or other factors associated with the pandemic develop, management's forecast could change in future periods requiring additional restaurant asset impairment. 35 -------------------------------------------------------------------------------- Tabl e of Contents 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 current 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. For further information on Other charges line items, refer to Note 5, Other Charges, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. Interest Expense and Interest Income Interest expense in 2020 and 2019 was$10.2 million . Our weighted average interest rate in 2020 and 2019 was 4.5% and 5.1%. During the fourth quarter of 2020, we received a$49.4 million federal cash tax refund that included approximately$1.1 million of interest, recorded in the Interest income and other, net line on the consolidated statements of operation and comprehensive loss. Income Taxes Income tax benefit was$7.5 million in 2020, compared to an income tax benefit of$14.3 million in 2019. Our effective tax rate was a 2.6% benefit in 2020 and a 64.5% benefit in 2019. The decrease in tax benefit for the year endedDecember 27, 2020 is primarily due to a$79.4 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. In addition to the cash tax refunds received during the year endedDecember 27, 2020 , the Company expects to generate approximately$16 million of additional cash tax refunds within the next 12 months. Liquidity and Capital Resources Cash and cash equivalents decreased$13.9 million to$16.1 million atDecember 27, 2020 , from$30.0 million at the beginning of the fiscal year. As the Company has 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 use available cash flow from operations to pay down debt, maintain existing restaurants and infrastructure, and execute on our long-term transformation strategy. As ofDecember 27, 2020 , the Company had approximately$128 million in liquidity, including cash on hand and available borrowing capacity under its credit facility. Cash Flows The table below summarizes our cash flows from operating, investing, and financing activities for each fiscal year presented (in thousands): 2020
2019
Net cash provided by operating activities$ 20,233 $
57,915
Net cash used in investing activities (21,393)
(57,030)
Net cash (used in) provided by financing activities (11,704) 9,678 Effect of exchange rate changes on cash
(1,065) 913
Net change in cash and cash equivalents$ (13,929) $
11,476
Operating Cash Flows Net cash flows provided by operating activities decreased$37.7 million to$20.2 million in 2020 as compared to 2019. The changes in net cash provided by operating activities are primarily attributable to a$139.7 million decrease in profit from operations, as well as changes in working capital as presented on the consolidated statements of cash flows. 36 -------------------------------------------------------------------------------- Tabl e of Contents Investing Cash Flows Net cash flows used in investing activities decreased$35.6 million to$21.4 million in 2020 as compared to 2019. The decrease was due to lower investment in restaurant maintenance, restaurant technology and infrastructure, Donatos®, and restaurant remodels and refreshes due to the COVID-19 pandemic. The following table lists the components of our capital expenditures for each fiscal year presented (in thousands): 2020 2019 Restaurant maintenance capital and other$ 9,794 $
17,288
Investment in technology, infrastructure, and other 9,718 32,617 Donatos® 2,620 6,585 Restaurant remodels - 819 Total capital expenditures$ 22,132 $ 57,309 Financing Cash Flows Net cash flows (used in) provided by financing activities decreased$21.4 million to$11.7 million in 2020 as compared to 2019. The decrease primarily resulted from a$48.9 million increase in net repayments of long-term debt and a$2.9 million increase in cash paid for debt issuance costs, partially offset by$28.7 million net cash proceeds received from the issuance of common stock, a decrease of$1.8 million for cash used to repurchase the Company's common stock, and a decrease of$0.1 million in cash proceeds received from the exercise of stock awards and the employee stock purchase plan. Credit Facility As ofDecember 27, 2020 , the Company had outstanding borrowings under the credit facility of$169.8 million , of which$9.7 million was classified as current, in addition to amounts issued under letters of credit of$8.7 million . Amounts issued under letters of credit reduce the amount available under the credit facility but are not recorded as debt. As ofDecember 27, 2020 , the Company had$111.8 million of available borrowing capacity under its credit facility. Net repayments during 2020 totaled$36.2 million . OnJanuary 10, 2020 , the Company replaced its prior credit facility with the credit facility, the five-year Amended and Restated Credit Agreement, which provides for$161.5 million revolving line of credit and a$138.5 million term loan for a total borrowing capacity of$300 million . 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. Due to the prolonged nature of the pandemic, the Company entered into the Second Amendment to its credit facility during the first quarter of 2021. The Second Amendment provides increased financial flexibility in the near-term, as we continue to de-lever our balance sheet. The Company obtained a waiver of certain financial covenants throughJuly 11, 2021 , followed by the introduction of more favorable covenant levels through the second quarter of 2022. Among other things, the Second Amendment also increases pricing, shortens the maturity date of amounts under the credit facility toJanuary 10, 2023 , and reduces the borrowing capacity of the revolving loans. For further discussion, see Note 2, COVID-19 Pandemic, of Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. LIBOR is set to terminate inDecember 2021 ; however, we anticipate an amended credit agreement will be executed at the new applicable reference rate. 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 negative effects on our business from the COVID-19 pandemic. As a result, we entered into the First Amendment to Credit Agreement and Waiver (the "First Amendment") to our credit facility inMay 2020 , which waived compliance with the lease adjusted leverage ratio financial covenant ("LALR ratio") and the fixed charge coverage ratio financial covenant ("FCC ratio") through the end of 2020. As ofDecember 27, 2020 , we were in compliance with all debt covenants. 37 -------------------------------------------------------------------------------- Tabl e of Contents Debt Outstanding Total debt outstanding decreased$36.2 million to$170.6 million atDecember 27, 2020 , from$206.9 million atDecember 29, 2019 , due to net repayments of$36.2 million on the credit facility during 2020. In response to the onset of the pandemic in early 2020, the Company drew down its remaining capacity under the credit facility. Three large repayments were made during 2020 to repay these borrowings made as a result of the COVID-19 pandemic, including$59 million such that the amount of the Company's consolidated cash on hand did not exceed$30 million on the First Amendment effective date as required by the First Amendment,$28.7 million during the second quarter of 2020 from the net proceeds received from the at-the-market equity offering as required by the First Amendment, and$42 million during the fourth quarter of 2020 resulting from the$49.4 million federal cash tax refund received during the quarter. Share Repurchase OnAugust 9, 2018 , the Company's board of directors authorized the Company's current share repurchase program of up to a total of$75 million of the Company's common stock. The share repurchase authorization will terminate upon completing repurchases of$75 million of common stock unless otherwise terminated by the board. Pursuant to the repurchase program, purchases may be made from time to time at the Company's discretion and the Company is not obligated to acquire any particular amount of common stock. From the date of the current program approval throughDecember 27, 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 ofDecember 27, 2020 , we had$68.4 million of availability under the current share repurchase program. EffectiveMarch 14, 2020 , the Company temporarily suspended its share repurchase program to provide additional liquidity during the COVID-19 pandemic. Our ability to repurchase shares is limited to conditions set forth by our lenders in the Second Amendment to our credit facility prohibiting us from repurchasing additional shares until the first fiscal quarter of 2022 at the earliest and not until we deliver a covenant compliance certificate demonstrating a lease adjusted leverage ratio less than or equal to 5.00:1.00. Seasonality Our business is subject to seasonal fluctuations. Prior to the COVID-19 pandemic, sales in most of our restaurants have been higher during the summer months and winter holiday season and lower during the fall season. As a result, our quarterly operating results and comparable restaurant revenue may fluctuate significantly as a result of seasonality. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter, and comparable restaurant sales for any particular future period may decrease. Contractual Obligations The following table summarizes the amounts of payments due under specified contractual obligations as ofDecember 27, 2020 (in thousands): Payments Due by Period Total 2021 2022 - 2023 2024 - 2025 Thereafter Long-term debt obligations(1)$ 196,951 $
16,786
15,479 1,581 2,558 2,547 8,793
Operating lease obligations(3) 720,017 86,111 149,342 137,888 346,676
Purchase obligations(4) 230,255 95,680 66,865 44,250 23,460
Other non-current liabilities(5) 6,740 1,277 2,648 376 2,439
Total contractual obligations $ 1,169,442 $
201,435
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(1) Long-term debt obligations primarily represent minimum required principal payments under our credit agreement including estimated interest of$25.9 million based on a 4.25% average borrowing interest rate. (2) Finance lease obligations include interest of$3.5 million . (3) Operating lease obligations exclude variable lease costs, such as sales based contingent rent, and include interest of$211.5 million . (4) Purchase obligations includes the Company's share of system-wide commitments for food, beverage, and restaurant supply items. These amounts require estimates and could vary due to the timing of volumes. (5) Other non-current liabilities primarily represent the employee deferred compensation plan liability. Refer to Note 16, Employee Benefit Programs, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information. 38 -------------------------------------------------------------------------------- Tabl e of Contents Financial Condition and Future Liquidity We require capital principally to maintain, improve, and refurbish existing restaurants, support infrastructure needs, and for general operating purposes, as well as to grow the business through new restaurant construction. In addition, we have and may continue to use capital to pay principal on our borrowings and repurchase our common stock as allowed by our credit agreement. Our primary short-term and long-term sources of liquidity are expected to be cash flows from operations and our revolving credit facility. Based upon current levels of operations and anticipated growth, we expect cash flows from operations and available borrowing capacity under the credit facility will be sufficient to meet debt service, capital expenditures, and working capital requirements for at least the next twelve months even with the expectation that the COVID-19 pandemic will continue to have a material adverse effect on our business. We and the restaurant industry in general maintain relatively low levels of accounts receivable and inventories, and vendors generally grant short-term trade credit for purchases, such as food and supplies. The addition of new restaurants and refurbishment of existing restaurants are reflected as long-term assets and not as part of working capital. Working Capital We typically maintain current liabilities in excess of our current assets which results in a working capital deficit. We are able to operate with a working capital deficit because restaurant sales are primarily conducted on a cash or credit card basis. Rapid turnover of inventory results in limited investment in inventories, and cash from sales is usually received before related payables for food, supplies, and payroll become due. In addition, receipts from the sale of gift cards are received well in advance of related redemptions. Rather than maintain higher cash balances that would result from this pattern of operating cash flows, we typically utilize operating cash flows in excess of those required for currently maturing liabilities to pay for capital expenditures, debt repayment, or to repurchase stock. When necessary, we utilize our credit facility to satisfy short-term liquidity requirements. We believe our future cash flows generated from restaurant operations combined with our remaining borrowing capacity under the credit facility will be sufficient to satisfy any working capital deficits and our planned capital expenditures. Critical Accounting Policies and Estimates Critical accounting policies and estimates are those we believe are both significant and that require us to make difficult, subjective, or complex judgments, often because we need to estimate the effect of inherently uncertain matters. We base our estimates and judgments on historical experiences and various other factors we believe to be appropriate under the circumstances. Actual results may differ from these estimates, including our estimates of future restaurant level cash flows, which are subject to the current economic environment, and we might obtain different results if we use different assumptions or conditions. We have identified the following as the Company's most critical accounting policies, which are most important to the portrayal of the Company's financial condition and results and require management's most subjective and complex judgment. Information regarding the Company's other significant accounting policies is disclosed in Note 1, Description of Business and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. Impairment of Long-Lived Assets - Long-lived assets, including restaurant sites, leasehold improvements, other fixed assets, right of use assets, and amortizable intangible assets are reviewed when indicators of impairment are present. Expected cash flows associated with an asset are the key factor in determining the recoverability of the asset. Identifiable cash flows are measured at the restaurant level. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, including assumptions on future revenue trends. Management's estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, changes in economic conditions, changes to our business model, or changes in operating performance. If the sum of the undiscounted cash flows is less than the carrying value of the asset, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. 39 -------------------------------------------------------------------------------- Tabl e of Contents Judgments made by management related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause us to realize a material impairment charge. Each restaurant's past and present operating performance were reviewed in combination with projected future results, primarily through projected undiscounted cash flows, which indicated possible impairment. We compared the carrying amount of each restaurant to its fair value as estimated by management. The fair value of the long-lived assets is typically determined using a discounted cash flow projection model. The discount factor is determined using external information regarding the risk-free rate of return, industry beta factors, and premium adjustments. These factors are combined with internal information such as the Company's average cost of debt and effective tax rate to determine a weighted average cost of capital which is applied to the undiscounted cash flows. In certain cases, management uses other market information such as market rent, when available, to estimate the fair value of a restaurant. The impairment charges represent the excess of each restaurant's carrying amount over its estimated fair value. During 2020, we determined 40 Company-owned restaurants were impaired during our cash flow analysis which resulted in a non-cash impairment charge of$21.7 million resulting from the effects of the COVID-19 pandemic on our business. During 2019, we impaired 29 Company-owned restaurants as a result of our cash flow analysis resulting in non-cash impairment charges of$15.1 million . Information technology systems, such as internal-use computer software, are reviewed and tested for recoverability if the internal-use computer software is not expected to provide substantive service potential, a significant change occurs to the extent or manner in which the software is used or is expected to be used, a significant change is made or will be made to the software program, or costs of developing or modifying internal-use software significantly exceed the amount originally expected to develop or modify the software. The Company impaired information technology assets totaling$5.2 million due to the COVID-19 pandemic redirecting our implementation of certain digital platforms in order to accelerate our speed to market. Recently Issued Accounting Standards See Note 3, Recent Accounting Pronouncements, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for our discussion of recently issued accounting standards. 40
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