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 2021 and 2020 refer to the twelve and forty weeks endedOctober 3, 2021 andOctober 4, 2020 , unless otherwise indicated. Overview Description of BusinessRed Robin Gourmet Burgers, Inc. , aDelaware corporation, together with its subsidiaries ("Red Robin ," "we," "us," "our," or the "Company"), primarily operates, franchises, and develops full-service restaurants with 531 locations inNorth America . As ofOctober 3, 2021 , the Company owned 430 restaurants located in 38 states. The Company also had 101 franchised full-service restaurants in 16 states and one Canadian province. The Company operates its business as one operating and one reportable segment. COVID-19 Impact The COVID-19 pandemic continues to create unprecedented challenges for our industry including government mandated restrictions, changing consumer behavior, labor and supply chain challenges, and wide spread inflationary costs. Even as government restrictions were lifted, and dining rooms returned to full capacity, the surge in the Delta variant continued to highlight the critical importance of providing a safe environment for our Team Members and Guests. In response to these COVID-19 challenges, the Company limited dining hours and seating capacity in order to preserve the consistent quality experience our Guests expect from us. Our disciplined Guest focus is delivered through our Total Guest Experience hospitality model ("TGX"), off-premises enhancements, and our management labor model. Our ability to attract and retain Team Members has become more challenging in the current competitive job market. Staffing is our number one priority; we have supported our staffing efforts through technology enhancements to the application and hiring process, improving our wage policies, holding national hiring days, and deploying internal and external resources to augment recruiting, hiring, and training efforts. The challenges in hiring and retention and global supply chain disruptions have affected many of our vendor partners, resulting in intermittent product and distribution shortages. We remain focused on proactively addressing these industry challenges, while delivering a great Guest experience and continuing to prioritize the satisfaction and retention of our Team Members. 13 -------------------------------------------------------------------------------- Table of Contents Financial and Operational Highlights The following summarizes the operational and financial highlights during the twelve weeks endedOctober 3, 2021 : Restaurant Revenue, compared to the same period in the prior year, is presented in the table below:
(millions)
Restaurant Revenue for the twelve weeks ended
67.0
Increase from non-comparable restaurants
6.2
Total increase
73.2
Restaurant Revenue for the twelve weeks ended
The following summarizes the operational and financial highlights during the forty weeks endedOctober 3, 2021 : Restaurant Revenue, compared to the same period in the prior year, is presented in the table below:
(millions)
Restaurant Revenue for the forty weeks ended
200.6
Decrease from non-comparable restaurants
1.8
Total increase
202.4
Restaurant Revenue for the forty weeks ended
Restaurant revenues and operating costs as a percentage of restaurant revenue for the period are detailed in the table below:
Twelve weeks ended 2021 compared to 2020 Twelve Weeks Ended 2021 compared to 2019(1)
October 3, 2021 October 4, 2020 Increase/(Decrease) October 6, 2019(1) Increase/(Decrease)
Restaurant revenue (millions) $ 270.2 $ 197.0 37.2 % $ 289.9 (6.8) %
(Percentage of
Restaurant operating costs: (Percentage of Restaurant Revenue) (Basis Points) Restaurant Revenue) (Basis Points)
Cost of sales 23.2 % 23.4 % (20) 23.8 % (60)
Labor 36.9 % 37.7 % (80) 36.2 % 70
Other operating 19.0 % 19.1 % (10) 15.3 % 370
Occupancy 8.3 % 11.2 % (290) 8.6 % (30)
Total 87.5 % 91.4 % (390) 83.9 % 360
(1) Presented for improved comparability to pre-COVID-19 operations.
Forty Weeks
Forty weeks ended 2021 compared to 2020 Ended 2021 compared to 2019(1)
October 6,
October 3, 2021 October 4, 2020 Increase/(Decrease) 2019(1) Increase/(Decrease)
Restaurant revenue (millions) $ 861.0 $ 658.6 30.7 %$ 992.8 (13.3) % (Percentage of Restaurant Restaurant operating costs: (Percentage of Restaurant Revenue) (Basis Points) Revenue) (Basis Points) Cost of sales 22.5 % 23.6 % (110) 23.7 % (120) Labor 36.0 % 38.8 % (280) 35.7 % 30 Other operating 18.1 % 18.9 % (80) 14.4 % 370 Occupancy 8.6 % 11.6 % (300) 8.6 % - Total 85.3 % 92.9 % (760) 82.4 % 280
(1) Presented for improved comparability to pre-COVID-19 operations.
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The following table summarizes Net loss, loss per diluted share, and adjusted loss per diluted share for the twelve and forty weeks endedOctober 3, 2021 andOctober 4, 2020 ; Twelve Weeks Ended Forty Weeks Ended October 3, 2021 October 4, 2020 October 3, 2021 October 4, 2020 Net loss as reported$ (14,980) $
(6,179)
Loss per share - diluted: Net loss as reported $ (0.95) $ (0.40) $ (1.83) $ (16.98) Restaurant closure costs 0.07 0.26 0.34 0.93 Asset impairment - - 0.09 1.49 Litigation contingencies 0.01 - 0.08 0.32 COVID-19 related costs 0.02 0.03 0.07 0.09 Board and stockholder matter costs - - 0.01 0.18 Severance and executive transition - - - 0.06 Goodwill impairment - - - 6.84 Income tax effect (0.03) (0.08) (0.16) (2.57)
Adjusted loss per share - diluted $ (0.88) $
(0.19) $ (1.40) $ (9.64)
Weighted average shares
outstanding
Basic 15,709 15,540 15,647 13,945
Diluted 15,709 15,540 15,647 13,945
We believe the non-GAAP measure of adjusted loss per diluted share gives the
reader additional insight into the ongoing operational results of the Company,
and it is intended to supplement the presentation of the Company's financial
results in accordance with GAAP.
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 3, 2021 October 4, 2020 October 3, 2021 October 4, 2020
Company-owned:
Beginning of period 430 450 443 454
Closed during the period - (6) (13) (10)
End of period 430 444 430 444
Franchised:
Beginning of period 101 102 103 102
Opened during the period - 1 - 1
Closed during the period - - (2) -
End of period 101 103 101 103
Total number of restaurants 531 547 531 547
________________________________________________________
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The following table presents total Company-owned and franchised restaurants by
state or province as of October 3, 2021 :
Company-Owned Restaurants Franchised Restaurants
State:
Arkansas 2 2
Alaska - 3
Alabama 4 -
Arizona 18 1
California 59 -
Colorado 22 -
Connecticut - 3
Delaware - 5
Florida 19 -
Georgia 6 -
Iowa 5 -
Idaho 8 -
Illinois 22 -
Indiana 13 -
Kansas - 4
Kentucky 4 -
Louisiana 2 -
Massachusetts 4 2
Maryland 13 -
Maine 2 -
Michigan - 20
Minnesota 4 -
Missouri 8 3
Montana - 2
North Carolina 17 -
Nebraska 4 -
New Hampshire 3 -
New Jersey 12 1
New Mexico 3 -
Nevada 6 -
New York 14 -
Ohio 18 2
Oklahoma 5 -
Oregon 15 5
Pennsylvania 11 21
Rhode Island 1 -
South Carolina 4 -
South Dakota 1 -
Tennessee 11 -
Texas 20 9
Utah 1 6
Virginia 20 -
Washington 38 -
Wisconsin 11 -
Province:
British Columbia - 12
Total 430 101
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Results of Operations
Operating results for each fiscal period presented below are expressed as a
percentage of total revenues, except for the components of restaurant operating
costs, which are expressed as a percentage of restaurant revenue.
This information has been prepared on a basis consistent with our audited 2020
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 3, October 4, October 6, October 3, October 4, October 6,
2021 2020 2019(1) 2021 2020 2019(1)
Revenues:
Restaurant revenue 98.1 % 98.3 % 98.5 % 98.0 % 98.6 % 98.1 %
Franchise and other revenues 1.9 % 1.7 % 1.5 % 2.0 % 1.4 % 1.9 %
Total revenues 100.0 % 100.0 % 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 23.2 % 23.4 % 23.8 % 22.5 % 23.6 % 23.7 %
Labor 36.9 % 37.7 % 36.2 % 36.0 % 38.8 % 35.7 %
Other operating 19.0 % 19.1 % 15.3 % 18.1 % 18.9 % 14.4 %
Occupancy 8.3 % 11.2 % 8.6 % 8.6 % 11.6 % 8.6 %
Total restaurant operating costs 87.5 % 91.4 % 83.9 % 85.3 % 92.9 % 82.4 %
Depreciation and amortization 6.9 % 9.6 % 7.2 % 7.3 % 10.2 % 7.0 %
General and administrative expenses 6.4 % 7.6 % 6.5 % 6.6 % 8.4 % 7.0 %
Selling expenses 4.6 % 3.0 % 6.0 % 3.6 % 4.0 % 4.8 %
Pre-opening and acquisition costs 0.2 % - % - % 0.1 % - % - %
Other charges 0.6 % 2.2 % (0.6) % 1.1 % 20.7 % 1.7 %
Loss from operations (4.4) % (12.3) % (1.8) % (2.2) % (35.0) % (1.4) %
Interest expense, net and other 1.0 % 1.1 % 0.6 % 1.1 % 1.1 % 0.7 %
Loss before income taxes (5.4) % (13.4) % (2.4) % (3.3) % (36.1) % (2.2) %
Income tax benefit 0.0 % (10.3) % (1.8) % - % (0.6) % (2.1) %
Net loss (5.4) % (3.1) % (0.6) % (3.3) % (35.5) % - %
___________________________________
(1) Presented for improved comparability to pre-COVID-19 operations.
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 3, October 4, Percent October 3, October 4, Percent
(Revenues in thousands) 2021 2020 Change 2021 2020 Change
Restaurant revenue $ 270,202 $ 197,009 37.2 % $ 861,036 $ 658,587 30.7 %
Franchise royalties, fees and
other revenue 5,242 3,469 51.1 % 17,658 9,078 94.5 %
Total revenues $ 275,444 $ 200,478 37.4 % $ 878,694 $ 667,665 31.6 %
Average weekly net sales volumes
in Company-owned restaurants $ 52,599 $ 39,418 33.4 % $ 50,324 $ 38,352 31.2 %
Total operating weeks 5,137 4,998 2.8 % 17,110 17,172 (0.4) %
Net sales per square foot $ 101 $ 75 33.6 % $ 322 $ 247 30.4 %
Restaurant revenue for the twelve weeks ended October 3, 2021 , which comprises
primarily food and beverage sales, increased $73.2 million , or 37.2%, as
compared to the twelve weeks ended October 4, 2020 . The increase was due to a
$67.0 million , or 34.3%, increase in comparable restaurant revenue, and a $6.2
million increase primarily from reopened restaurants that were temporarily
closed during third quarter 2020. The comparable restaurant revenue increase was
driven by a 22.5% increase in Guest count and a 11.8% increase in average Guest
check. The increase in average Guest check resulted from a 3.5% increase in
pricing and a 8.4% increase in menu mix, partially offset by a 0.1% decrease
from higher discounting. The increase in menu mix was primarily driven by higher
sales of beverages and our limited time menu offerings. Off-premises sales
comprised 30.8% of total food and beverage sales during third quarter 2021,
compared to 40.7% in the same period in 2020.
Restaurant revenue for the forty weeks ended October 3, 2021 , increased $202.4
million or 30.7%, as compared to the forty weeks ended October 4, 2020 . The
increase was due to a $200.6 million , or 31.5%, increase in comparable
restaurant revenue and a $1.8 million increase primarily from reopened
restaurants that were temporarily closed during 2020. The comparable restaurant
revenue increase was driven by a 21.1% increase in Guest counts and a 10.5%
increase in average Guest check. The increase in average Guest check resulted
from a 3.5% increase in pricing and a 6.6% increase in menu mix, and a 0.4%
increase from lower discounting. The increase in menu mix was primarily driven
by higher sales of beverages, appetizers, and limited time menu offerings.
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 are
comprised of Company-owned restaurants that have operated five full quarters as
of the end of the period presented. Company-owned restaurants that were
temporarily closed due to the COVID-19 pandemic were not included in the
comparable base for the twelve and forty weeks ended October 3, 2021 or
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, the average square footage of our restaurants, as well as the impact of
changing capacity limitations in response to COVID-19 levels in a given
locality. Net sales per square foot represents the total restaurant revenue for
Company-owned restaurants included in the comparable base divided by the total
square feet of Company-owned restaurants included in the comparable base.
Franchise and other revenue increased $1.8 million for the twelve weeks ended
October 3, 2021 compared to the twelve weeks ended October 4, 2020 , due to
improved comparable franchise sales performance during the third fiscal quarter
of 2021.
Franchise and other revenue increased $8.6 million for the forty weeks ended
October 3, 2021 compared to the forty weeks ended October 4, 2020 , due to
improved comparable franchise sales performance, charging and collecting royalty
payments and advertising contributions from our franchisees during the third
fiscal quarter of 2021. During 2020, the Company had temporarily abated
franchisee royalty and advertising contribution payments in mid-March, and
resumed collection during the latter half of the second fiscal quarter of 2020,
and increased gift card breakage.
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Cost of Sales
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except October 4, October 3, October 4,
percentages) October 3, 2021 2020 Percent Change 2021 2020 Percent Change
Cost of sales $ 62,671 $ 46,037 36.1 % $ 193,754 $ 155,243 24.8 %
As a percent of restaurant
revenue 23.2 % 23.4 % (0.2) % 22.5 % 23.6 % (1.1) %
Cost of sales, which comprises food and beverage costs, is variable and
generally fluctuates with sales volume. Cost of sales as a percentage of
restaurant revenue decreased 20 basis points for the twelve weeks ended
October 3, 2021 as compared to the same period in 2020. The decrease was
primarily driven by pricing, favorable mix shifts, lower waste, and higher
rebates, partially offset by commodity inflation.
Cost of sales as a percentage of restaurant revenue decreased 110 basis points
for the forty weeks ended October 3, 2021 as compared to the same period in
2020. The decrease was primarily driven by pricing, favorable mix shifts, and
rebates.
Labor
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except October 4, October 3, October 4,
percentages) October 3, 2021 2020 Percent Change 2021 2020 Percent Change
Labor $ 99,725 $ 74,344 34.1 % $ 310,333 $ 255,652 21.4 %
As a percent of restaurant
revenue 36.9 % 37.7 % (0.8) % 36.0 % 38.8 % (2.8) %
Labor costs include restaurant-level hourly wages and management salaries as
well as related taxes and benefits. For the twelve weeks ended October 3, 2021 ,
labor as a percentage of restaurant revenue decreased 80 basis points compared
to the same period in 2020. The decrease was primarily driven by industry
staffing shortages and sales leverage, partially offset by higher wage rates,
staffing costs and increased restaurant management compensation costs in 2021.
$3.1 million of transitory labor and other operating costs were incurred due to
staffing challenges, including hiring and training costs, temporarily outsourced
janitorial costs, one time bonuses, and overtime pay.
For the forty weeks ended October 3, 2021 , labor as a percentage of restaurant
revenue decreased 280 basis points compared to the same period in 2020. The
decrease was primarily driven by staffing shortages, and sales leverage,
partially offset by higher wage rates, staffing costs and increased restaurant
management compensation costs in 2021.
Other Operating
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except October 4, October 3, October 4,
percentages) October 3, 2021 2020 Percent Change 2021 2020 Percent Change
Other operating $ 51,462 $ 37,631 36.8 % $ 156,102 $ 124,585 25.3 %
As a percent of restaurant
revenue 19.0 % 19.1 % (0.1) % 18.1 % 18.9 % (0.8) %
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 3, 2021 , other operating
costs as a percentage of restaurant revenue decreased 10 basis points as
compared to the same period in 2020. The decrease was primarily driven by sales
leverage and lower utilities, and lower supplies due to lower off-premises sales
mix, partially offset by increased hiring advertisement costs and janitorial and
maintenance expenses.
For the forty weeks ended October 3, 2021 , other operating costs as a percentage
of restaurant revenue decreased 80 basis points as compared to the same period
in 2020. The decrease was primarily driven by sales leverage and lower utilities
and supplies due to lower off-premises sales mix, partially offset by increased
hiring costs.
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Occupancy
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except October 4, October 3, October 4,
percentages) October 3, 2021 2020 Percent Change 2021 2020 Percent Change
Occupancy $ 22,519 $ 22,099 1.9 % $ 74,233 $ 76,514 (3.0) %
As a percent of restaurant
revenue 8.3 % 11.2 % (2.9) % 8.6 % 11.6 % (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 3, 2021 ,
occupancy costs as a percentage of restaurant revenue decreased 290 basis points
compared to the same period in 2020 primarily driven by sales leverage and
restructured leases.
For the forty weeks ended October 3, 2021 , occupancy costs as a percentage of
restaurant revenue decreased 300 basis points compared to the same period in
2020 primarily driven by sales leverage, savings from permanently closed
restaurants and restructured leases.
Our fixed rents for the twelve weeks ended October 3, 2021 and October 4, 2020
were $15.8 million and $14.7 million , an increase of $1.1 million due to
recognizing ongoing fixed rents of Company-owned restaurants that were
temporarily closed due to the COVID-19 pandemic in Closed restaurant expense (a
component of Other Charges) in 2020, compared to Occupancy in 2021.
Our fixed rents for the forty weeks ended October 3, 2021 and October 4, 2020
were $52.8 million and $51.0 million , an increase of $1.8 million due to
recognizing ongoing fixed rents of Company-owned restaurants that were
temporarily closed due to the COVID-19 pandemic in Closed restaurant expense (a
component of Other Charges) in 2020, compared to Occupancy in 2021, partially
offset by a net decrease in store count resulting from 13 locations permanently
closed during the period.
Depreciation and Amortization
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except October 4, October 3, October 4,
percentages) October 3, 2021 2020 Percent Change 2021 2020 Percent Change
Depreciation and
amortization $ 18,881 $ 19,173 (1.5) % $ 63,984 $ 68,053 (6.0) %
As a percent of total
revenues 6.9 % 9.6 % (2.7) % 7.3 % 10.2 % (2.9) %
Depreciation and amortization includes depreciation on capital expenditures for
restaurants and corporate assets as well as amortization of acquired franchise
rights, leasehold interests, and certain liquor licenses. For the twelve weeks
ended October 3, 2021 , depreciation and amortization expense as a percentage of
revenue decreased 270 basis points over the same period in 2020. For the forty
weeks ended October 3, 2021 , depreciation and amortization expense as a
percentage of revenue decreased 290 basis points over the same period in 2020.
The decreases are primarily due to net closed Company-owned restaurants, and
sales leverage.
General, and Administrative expenses
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except October 4, October 3, October 4,
percentages) October 3, 2021 2020 Percent Change 2021 2020 Percent Change
General, and administrative
expenses $ 17,691 $ 15,190 16.5 % $ 57,664 $ 56,054 2.9 %
As a percent of total
revenues 6.4 % 7.6 % (1.2) % 6.6 % 8.4 % (1.8) %
General, and administrative costs include all corporate and administrative
functions, excluding Selling expenses discussed below. Components of this
category include our restaurant support center, regional, and franchise support
salaries and benefits; travel; professional and consulting fees; corporate
information systems; legal expenses; office rent; training; and board of
directors expenses.
General, and administrative expenses in the twelve weeks ended October 3, 2021
increased $2.5 million , or 16.5 %, as compared to the same period in 2020. The
increase in general and administrative expenses in 2021 was primarily driven by
merit increases and lapping temporary salary reductions in 2020, increased
travel costs, and higher professional services spend.
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General, and administrative expenses in the forty weeks ended October 3, 2021
increased $1.6 million , or 2.9 %, as compared to the same period in 2020. The
increase in general and administrative expenses in 2021 was primarily driven by
higher Team Member benefit costs, merit increases and lapping temporary salary
reductions in 2020, partially offset by decreased travel costs and other
corporate costs.
Selling expenses
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except October 3, October 4, October 3, October 4,
percentages) 2021 2020 Percent Change 2021 2020 Percent Change
Selling expenses $ 12,652 $ 6,094 * $ 31,635 $ 26,429 19.7 %
As a percent of total
revenues 4.6 % 3.0 % 1.6 % 3.6 % 4.0 % (0.4) %
Selling expenses include all marketing and advertising costs associated with the
Company's marketing strategy.
Selling expenses in the twelve weeks ended October 3, 2021 increased $6.6
million , as compared to the same period in 2020. The increase in selling
expenses in 2021 was primarily driven by the return of marketing spend closer to
a more normalized level in 2021.
Selling expenses in the forty weeks ended October 3, 2021 increased $5.2
million , or 19.7 %, as compared to the same period in 2020. The increase in
selling expenses in 2021 was primarily driven by the return of marketing spend
closer to a more normalized level in 2021.
* Percentage increases and decreases over 100 percent were not considered
meaningful.
Pre-opening Costs
Twelve Weeks Ended Forty Weeks Ended
(In thousands, except October 3,
percentages) 2021 October 4, 2020 Percent Change October 3, 2021 October 4, 2020 Percent Change
Pre-opening costs $ 418 $ 89 * $ 792 $ 245 *
As a percent of total
revenues 0.2 % - % 0.2 % 0.1 % - % 0.1 %
* Percentage increases and decreases over 100 percent were not considered
meaningful.
Pre-opening costs, which are expensed as incurred, comprise the costs related to
preparing restaurants to introduce Donatos®, 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 3,
2021 and October 4, 2020 related to the rollout of Donatos®. The Company
completed the rollout of 38 restaurants during the twelve weeks ended October 3,
2021 , and expects to continue its roll out of Donatos® to approximately 40
restaurants in the fourth quarter of fiscal year 2021.
Interest Expense, Net and Other
Interest expense, net and other was $2.9 million for the twelve weeks ended
October 3, 2021 , an increase of $0.6 million , or 26.1%, compared to the same
period in 2020. The increase was primarily related to a higher weighted average
interest rate for the quarter due to increased rates associated with the Second
Amendment, partially offset by a lower average outstanding debt balance compared
to the same period in 2020. Our weighted average interest rate was 6.8% for the
twelve weeks ended October 3, 2021 as compared to 5.0% for the same period in
2020.
Interest expense, net and other was $10.0 million for the forty weeks ended
October 3, 2021 , an increase of $2.4 million , or 31.6%, from the same period in
2020. The increase was primarily related to a higher weighted average interest
rate for the period as well as the partial write off of approximately $1.2
million of deferred financing charges related to the modification of our
revolver in conjunction with the execution of the Second Amendment on
February 25, 2021 , partially offset by a lower average outstanding debt balance
compared to the same period in 2020. Our weighted average interest rate was 6.6%
for the forty weeks ended October 3, 2021 as compared to 4.5% for the same
period in 2020.
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Provision for Income Taxes
The effective tax rate for the twelve weeks ended October 3, 2021 was a 0.2%
benefit, compared to a 77.0% benefit for the twelve weeks ended October 4, 2020 .
The effective tax benefit for the forty weeks ended October 3, 2021 was 1.1%,
compared to a 1.8% benefit for the forty weeks ended October 4, 2020 . The
decrease in tax benefit for the twelve and forty weeks ended October 3, 2021 is
primarily due to the change in full valuation allowance recognition.
The Company has filed federal and state cash tax refund claims totaling
approximately $16 million during 2021 from net operating loss carrybacks. While
we expect to receive a portion of the refunds in 2021, due to government delays
in processing these claims we do not expect to receive the majority until 2022.
Liquidity and Capital Resources
Cash and cash equivalents increased $1.6 million to $17.8 million as of
October 3, 2021 , from $16.1 million at the beginning of the fiscal year. As the
Company continues to recover from the COVID-19 pandemic and generates operating
cash flow, the Company is using available cash flow from operations to pay down
debt, maintain existing restaurants and infrastructure, and execute on its
long-term strategic initiatives. As of October 3, 2021 , the Company had
approximately $75.2 million in liquidity, including the impact of a $30 million
capacity reduction on our revolving line of credit pursuant to the Second
Amendment, including cash on hand and available borrowing capacity.
Cash Flows
The table below summarizes our cash flows from operating, investing, and
financing activities for each period presented (in thousands):
Forty Weeks Ended
2021 2020
Net cash provided by (used in) operating activities $ 37,617 $ (22,401)
Net cash used in investing activities (19,967) (14,131)
Net cash (used in) provided by financing activities (16,037) 34,020
Effect of exchange rate changes on cash 28 (166)
Net change in cash and cash equivalents $
1,641
Operating Cash Flows Net cash flows provided by (used in) operating activities increased$61.0 million to$37.6 million for the forty weeks endedOctober 3, 2021 . The changes in net cash provided by (used in) operating activities are primarily attributable to a$103.3 million increase in profit from operations (defined as the change in operating margins from comparable and non-comparable restaurants), lower accounts receivable and higher accounts payable balances due to the timing of operational receipts and payments, as well as other changes in working capital as presented in the Condensed Consolidated Statements of Cash Flows. Investing Cash Flows Net cash flows used in investing activities increased$5.8 million to$20.0 million for the forty weeks endedOctober 3, 2021 , as compared to$14.1 million for the same period in 2020. The increase is primarily due to increased spend on Donatos® associated with adding 38 restaurants in the third fiscal quarter. 22 -------------------------------------------------------------------------------- Table of Contents The following table lists the components of our capital expenditures, net of currency translation, for the forty weeks endedOctober 3, 2021 andOctober 4, 2020 (in thousands): Forty Weeks Ended October 4, October 3, 2021 2020 Donatos® expansion $ 7,687 $ - Restaurant improvement capital and other 6,467 8,433 Investment in technology infrastructure and other 5,355 6,437 New restaurants and restaurant refreshes 478 - Total capital expenditures $ 19,987$ 14,870 Financing Cash Flows Net cash flows used in financing activities increased$51.0 million to$16.0 million for the forty weeks endedOctober 3, 2021 , as compared to net cash flows provided by financing activities of$34.0 million in the same period in 2020. The decrease is due to a$28.9 million decrease in proceeds from the issuance of common stock, net of issuance costs, and a$24.7 million increase in net repayments made on long-term debt, partially offset by a decrease in cash used for debt issuance costs, and a decrease in cash used to repurchase the Company's common stock due to the temporary suspension of the Company's share repurchase program beginning in 2020. Credit Facility As ofOctober 3, 2021 , the Company had outstanding borrowings under the Credit Facility of$156.3 million , of which$9.7 million was classified as current, in addition to amounts issued under letters of credit of$8.6 million . Amounts issued under letters of credit reduce the amount available under the Credit Facility but are not recorded as debt. As ofOctober 3, 2021 , the Company had$57.4 million of available borrowing capacity under its Credit Facility, including the impact of a$30 million capacity reduction on our revolving line of credit pursuant to the Second Amendment. Net payments during the forty weeks endedOctober 3, 2021 totaled$14.3 million , and net draws during the same period in 2020 totaled$9.2 million . We have made net repayments on our Credit Facility of$50.5 million sinceDecember 29, 2019 . As discussed in Footnote 6, Borrowings, in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, In response to the continued uncertainty around the impact of industry labor and supply chain challenges, as well as theCOVID-19 Delta variant, the Company amended its current Credit Facility onNovember 9, 2021 to obtain additional flexibility to continue to implement our business strategy. The Company anticipates refinancing its Credit Facility in 2022. Covenants We are subject to a number of customary covenants under our Credit Facility, including limitations on additional borrowings, acquisitions, stock repurchases, sales of assets, and dividend payments. As discussed in Footnote 6, Borrowings, in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, we entered into the Third Amendment onNovember 9, 2021 , which waives compliance with the Leverage Ratio Covenant for the third fiscal quarter of 2021, and provides for adjustments during fourth fiscal quarter of 2021, and the first, second, and third fiscal quarters of 2022. Additionally, the Third Amendment provides for adjustments to the calculation of the FCCR Covenant when it becomes applicable in the first fiscal quarter of 2022. See Footnote 6, Borrowings for additional details. As ofOctober 3, 2021 , the Company is in compliance with all applicable covenants applicable to our Credit Facility, as amended. Due to an anticipated delay in the timing of receipt of cash tax refunds, during the third fiscal quarter and in addition to the Third Amendment, the Company obtained a waiver from our lenders, waiving the application of our FCCR Covenant for the third and fourth fiscal quarters of 2021. Debt Outstanding Total debt outstanding decreased$13.4 million to$157.2 million atOctober 3, 2021 , from$170.6 million atDecember 27, 2020 , primarily due to net payments of$14.3 million on the Credit Facility, offset by accruing utilization fees on the Credit Facility during the forty weeks endedOctober 3, 2021 . 23 -------------------------------------------------------------------------------- Table of Contents 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 3, 2021 , we have repurchased a total of 226,500 shares at an average price of$29.14 per share for an aggregate amount of$6.6 million . Accordingly, as ofOctober 3, 2021 , we had$68.4 million of availability under the current share repurchase program. EffectiveMarch 14, 2020 , the Company temporarily suspended its share repurchase program to provide additional liquidity during the COVID-19 pandemic. 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. Inflation The primary inflationary factors affecting our operations are food, labor costs, energy costs, and materials used in the construction of new restaurants. 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 and commodity costs for the remainder of 2021. 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 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 18, 2021 , except for lease obligations as a result of contractual rent concessions negotiated by the Company during the fiscal quarter endedOctober 3, 2021 . See the maturity of lease liabilities table in Note 3, 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 27, 2020 . 24 -------------------------------------------------------------------------------- Table of Contents 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. Forward-Looking Statements Certain information and statements contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA") codified at Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act. Forward-looking statements include statements regarding our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. These statements may be identified, without limitation, by the use of forward-looking terminology such as "anticipate," "assume," "believe," "could," "estimate," "expect," "future," "intend," "may," "plan," "project," "will," "continue," and similar expressions. Forward-looking statements may relate to, among other things: (i) our ability to re-finance our Credit Facility in 2022, (ii) anticipated impacts of litigation, including employment-related claims, on our financial position and results of operations, (iii) anticipated impacts of COVID-19 on our business, our financial position and results of operations, (iv) expectations regarding our ability to attract and retain Team Members, (v) our business focus and strategy, (vi) expectations regarding claims for tax refunds, (vii) our ability to maintain our working capital position, (viii) our ability to use our Credit Facility to satisfy our working capital deficit, short-term liquidity requirements and capital expenditures, (ix) anticipated impacts of inflation, and (x) availability of food and supplies meeting our specifications from alternate sources.g. Although we believe the expectations reflected in our forward-looking statements are based on reasonable assumptions, such expectations may prove to be materially incorrect due to known and unknown risks and uncertainties. In some cases, information regarding certain important factors that could cause actual results to differ materially from a forward-looking statement appears together with such statement. In addition, the factors described under Risk Factors, as well as other possible factors not listed, could cause actual results to differ materially from those expressed in forward-looking statements, including, without limitation, the following: •the impact of COVID-19 on our results of operations, supply chain, and liquidity; •the effectiveness of the Company's strategic initiatives, including alternative labor models, service, and operational improvement initiatives; •our ability to recruit staff, train, and retain our workforce for service execution; •the effectiveness of the Company's marketing strategies and promotions; •menu changes, including the anticipated sales growth, costs, and timing of the Donatos® expansion; •the implementation, rollout, and timing of technology solutions in our restaurants and at our restaurant support center, in addition to digital platforms that are accessed by our Guests; •our ability to achieve and sustain revenue and cost savings from off-premise sales and other initiatives; •competition in the casual dining market and discounting by competitors; •changes in consumer spending trends and habits; •changes in the cost and availability of key food products and distribution, restaurant equipment, construction materials, labor, and energy, including the existence of alternate suppliers and the availability of supplies meeting our specification; •general economic conditions, including changes in consumer disposable income, weather conditions, and related events in regions where our restaurants are operated; •the adequacy of cash flows and the cost and availability of capital or Credit Facility borrowings, including our ability to refinance our Credit Facility, on terms we expect or at all •government delays in processing tax refund claims •the level and impacts of inflation; •the impact of federal, state, and local regulation of the Company's business; •changes in federal, state, or local laws and regulations affecting the operation of our restaurants, including minimum wages, consumer health and safety, health insurance coverage, nutritional disclosures, and employment eligibility-related documentation requirements; and •costs and other effects of legal claims by Team Members, franchisees, customers, vendors, stockholders, and others, including negative publicity regarding food safety or cyber security. 25 -------------------------------------------------------------------------------- Table of Contents All forward-looking statements speak only as of the date made. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk There has been no material change in commodity price risk or interest rate risk since the disclosures included in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 27, 2020 , filed with theSEC onMarch 3, 2021 . We continue to monitor our interest rate risk on an ongoing basis and may use interest rate swaps or similar instruments in the future to manage our exposure to interest rate changes related to our borrowings as the Company deems appropriate. During the quarter endedOctober 3, 2021 , we had an average of$154.7 million of borrowings subject to variable interest rates. A 1.0% change in the effective interest rate applied to these loans would have resulted in a pre-tax interest expense fluctuation of$1.5 million on an annualized basis. The Company's restaurant menus are highly dependent upon a few select commodities, including ground beef, poultry, and potatoes. We purchase food, supplies and other commodities for use in our operations based on prices established with our suppliers. Many of the commodities purchased by us are subject to volatility due to market supply and demand factors outside of our control, including the price of other commodities, weather, seasonality, production, trade policy, and other factors. As a result of the COVID-19 pandemic, we have experienced and expect to continue to experience distribution disruptions, commodity cost inflation, and certain food and supply shortages. To manage this risk in part, we enter into fixed-price purchase commitments for certain commodities; however, it may not be possible for us to enter into fixed-price purchase commitments for certain commodities, or we may choose not to enter into fixed-price contracts for certain commodities. We believe that substantially all of our food and supplies meeting our specifications are available from alternate sources, which we have identified to diversify our supply chain to mitigate our overall commodity risk. We may or may not have the ability to increase menu prices, or vary menu items, in response to commodity price increases. A 1.0% increase in food and beverage costs would negatively impact cost of sales by approximately$2.0 million on an annualized basis. ITEM 4. Controls and Procedures Evaluation of Disclosure Controls and ProceduresThe Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in theSEC's rules and forms, and that such information is accumulated and communicated to the management of the Company ("Management"), including the Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, Management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. The Company's CEO and CFO have concluded that, based upon the evaluation of disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act), the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. Changes in Internal Control Over Financial Reporting There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 26
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