Red Robin Gourmet Burgers Inc.

08/22/2024 | Press release | Distributed by Public on 08/22/2024 14:36

Quarterly Report for Quarter Ending July 14, 2024 (Form 10-Q)

rrgb-20240714
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 14, 2024
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-34851
RED ROBIN GOURMET BURGERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1573084
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
10000 E. Geddes Avenue, Suite 500
Englewood, Colorado 80112
(Address of principal executive offices) (Zip Code)
(303)846-6000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Trading symbol(s) Name of each exchange on which registered
Common Stock, $0.001 par value
RRGB Nasdaq (Global Select Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☐ Accelerated Filer ☒
Non-accelerated Filer ☐ Smaller Reporting Company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒
As of August 20, 2024, there were 15,753,528 shares of the registrant's common stock, par value of $0.001 per share outstanding.
Table of Contents
RED ROBIN GOURMET BURGERS, INC.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1.
Financial Statements (unaudited)
1
Condensed Consolidated Balance Sheets
1
Condensed Consolidated Statements of Operations and ComprehensiveIncome (Loss)
2
Condensed Consolidated Statements of Stockholders' Equity (Deficit)
3
Condensed Consolidated Statements of Cash Flows
5
Notes to the Condensed Consolidated Financial Statements
6
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
15
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
31
ITEM 4.
Controls and Procedures
31
PART II - OTHER INFORMATION
ITEM 1.
Legal Proceedings
32
ITEM 1A.
Risk Factors
32
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32
ITEM 5.
Other Information
33
ITEM 6.
Exhibits
34
Signature
35
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except for per share amounts) July 14, 2024 December 31, 2023
Assets:
Current assets:
Cash and cash equivalents $ 23,135 $ 23,634
Accounts receivable, net 12,617 21,592
Inventories 27,252 26,839
Prepaid expenses and other current assets 13,876 11,785
Restricted cash 7,992 7,931
Total current assets 84,872 91,781
Property and equipment, net 223,350 261,258
Operating lease assets, net 352,654 361,609
Intangible assets, net 15,064 15,491
Other assets, net 13,192 11,795
Total assets $ 689,132 $ 741,934
Liabilities and stockholders'equity (deficit):
Current liabilities:
Accounts payable $ 31,737 $ 27,726
Accrued payroll and payroll-related liabilities 35,274 32,524
Unearned revenue 16,703 36,067
Current portion of operating lease obligations 51,912 43,819
Accrued liabilities and other 54,028 46,201
Total current liabilities 189,654 186,337
Long-term debt 162,309 182,594
Long-term portion of operating lease obligations 364,082 383,439
Other non-current liabilities 9,630 10,006
Total liabilities 725,675 762,376
Commitments and contingencies (see Note 8. Commitments and Contingencies)
Stockholders' equity (deficit):
Common stock; $0.001 par value: 45,000 shares authorized; 20,449 shares issued; 15,755 and 15,528 shares outstanding as of July 14, 2024 and December 31, 2023
20 20
Preferred stock, $0.001 par value: 3,000 shares authorized; no shares issued and outstanding as of July 14, 2024 and December 31, 2023
- -
Treasury stock 4,694 and 4,921 shares, at cost, as of July 14, 2024 and December 31, 2023
(166,585) (174,702)
Paid-in capital 224,425 229,680
Accumulated other comprehensive loss, net of tax (36) (22)
Accumulated deficit (94,367) (75,418)
Total stockholders' equity (deficit) (36,543) (20,442)
Total liabilities and stockholders' equity (deficit) $ 689,132 $ 741,934
See Notes to Condensed Consolidated Financial Statements
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RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Twelve Weeks Ended Twenty-Eight Weeks Ended
(in thousands, except for per share amounts) July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023
Revenues:
Restaurant revenue $ 294,457 $ 293,281 $ 673,025 $ 700,174
Franchise revenue 4,287 3,544 9,628 8,826
Other revenue 1,410 1,823 6,042 7,460
Total revenues 300,154 298,648 688,695 716,460
Costs and expenses:
Restaurant operating costs (excluding depreciation and amortization shown separately below):
Cost of sales 69,444 71,372 159,653 171,042
Labor 113,908 109,678 262,866 255,100
Other operating 51,783 51,842 118,273 123,892
Occupancy 24,595 23,482 56,023 53,283
Depreciation and amortization 13,402 15,756 31,556 37,581
Selling, general, and administrative expenses 28,652 26,864 68,041 61,387
Pre-opening costs - 4 - 586
Other charges (gains), net 2,931 (10,607) (1,045) (848)
Total costs and expenses 304,715 288,391 695,367 702,023
Income (loss) from operations (4,561) 10,257 (6,672) 14,437
Other expense:
Interest expense 5,107 6,483 12,587 14,252
Interest income and other, net
(139) (304) (451) (655)
Income (loss) before income taxes
(9,529) 4,078 (18,808) 840
Income tax provision (benefit)
(40) 156 141 176
Net income (loss) $ (9,489) $ 3,922 $ (18,949) $ 664
Income (loss) per share:
Basic $ (0.61) $ 0.24 $ (1.21) $ 0.04
Diluted $ (0.61) $ 0.24 $ (1.21) $ 0.04
Weighted average shares outstanding:
Basic 15,680 16,037 15,608 16,014
Diluted 15,680 16,291 15,608 16,367
Other comprehensive income (loss):
Foreign currency translation adjustment $ 4 $ 4 $ (14) $ 11
Other comprehensive income (loss), net of tax 4 4 (14) 11
Total comprehensive income (loss) $ (9,485) $ 3,926 $ (18,963) $ 675
See Notes to Condensed Consolidated Financial Statements.
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RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Unaudited)
Common Stock Treasury Stock Accumulated
Other
Comprehensive
Income/(Loss),
net of tax
Paid-in
Capital 		Accumulated Deficit
(in thousands) Shares Amount Shares Amount Total
Balance, December 31, 2023 20,449 $ 20 4,921 $ (174,702) $ 229,680 $ (22) $ (75,418) $ (20,442)
Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan - - (84) 3,011 (3,382) - - (371)
Non-cash stock compensation - - - - 1,190 - - 1,190
Net loss - - - - - - (9,460) (9,460)
Other comprehensive income (loss), net of tax - - - - - (18) - (18)
Balance, April 21, 2024 20,449 $ 20 4,837 $ (171,691) $ 227,488 $ (40) $ (84,878) $ (29,101)
Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan - - (143) 5,106 (4,919) - - 187
Non-cash stock compensation - - - - 1,856 - - 1,856
Net loss - - - - - - (9,489) (9,489)
Other comprehensive income (loss), net of tax - - - - - 4 - 4
Balance, July 14, 2024 20,449 $ 20 4,694 $ (166,585) $ 224,425 $ (36) $ (94,367) $ (36,543)
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Common Stock Treasury Stock Accumulated
Other
Comprehensive
Income/(Loss),
net of tax
Paid-in
Capital 		Accumulated Deficit
(in thousands) Shares Amount Shares Amount Total
Balance, December 25, 2022 20,449 $ 20 4,515 $ (182,810) $ 238,803 $ (34) $ (54,190) $ 1,789
Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan - - (129) 5,330 (5,106) - - 224
Non-cash stock compensation - - - - 2,179 - - 2,179
Net income (loss) - - - - - - (3,256) (3,256)
Other comprehensive income (loss), net of tax - - - - - 8 - 8
Balance, April 16, 2023 20,449 $ 20 4,386 $ (177,480) $ 235,876 $ (26) $ (57,445) $ 945
Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan - - (250) 9,933 (8,297) - - 1,636
Acquisition of treasury stock - - 382 (4,999) - - - (4,999)
Non-cash stock compensation - - - - 1,519 - - 1,519
Net income (loss) - - - - - - 3,922 3,922
Other comprehensive income (loss), net of tax - - - - - 4 - 4
Balance, July 9, 2023 20,449 $ 20 4,518 $ (172,546) $ 229,098 $ (22) $ (53,524) $ 3,026
See Notes to Condensed Consolidated Financial Statements.
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RED ROBIN GOURMET BURGERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-Eight Weeks Ended
(in thousands) July 14, 2024 July 9, 2023
Cash flows from operating activities:
Net income (loss) $ (18,949) $ 664
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 31,556 37,581
Asset impairment 1,128 2,387
Non-cash other charges (gains), net 539 (619)
Stock-based compensation expense 3,046 3,691
Gain on sale of restaurant property
(7,425) (14,803)
Other, net 1,074 251
Changes in operating assets and liabilities, net of business acquisition:
Accounts receivable 8,778 8,703
Income tax receivable 197 102
Inventories (492) (225)
Prepaid expenses and other current assets (86) (386)
Operating lease assets, net of liabilities (224) (6,879)
Trade accounts payable and accrued liabilities 16,171 500
Unearned revenue (19,364) (13,230)
Other operating assets and liabilities, net (1,703) 488
Net cash provided by operating activities 14,246 18,225
Cash flows from investing activities:
Purchases of property, equipment, and intangible assets (13,856) (25,814)
Net proceeds from sale-leaseback 23,271 28,451
Proceeds from sales of property and equipment and other investing activities - 794
Acquisition of franchised restaurants - (3,529)
Net cash provided by (used in) investing activities 9,415 (98)
Cash flows from financing activities:
Proceeds from borrowings on revolving credit facilities 25,500 -
Repayments of borrowings on revolving credit facilities (25,500) (15,000)
Repayments of borrowings on term loan (21,232) (1,500)
Repayments of finance lease obligations (619) (448)
Purchase of treasury stock - (4,999)
(Uses) Proceeds from other financing activities, net (2,246) 1,861
Net cash used in financing activities (24,097) (20,086)
Effect of exchange rate changes on cash (2) -
Net change in cash and cash equivalents, and restricted cash (438) (1,959)
Cash and cash equivalents, and restricted cash, beginning of period 31,565 58,206
Cash and cash equivalents, and restricted cash, end of period $ 31,127 $ 56,247
Supplemental disclosure of cash flow information
Income tax paid, net $ 47 $ 104
Interest paid, net of amounts capitalized $ 10,767 $ 11,495
Right of use assets obtained in exchange for operating lease obligations $ 17,832 $ 34,928
Right of use assets obtained in exchange for finance lease obligations $ - $ 82
See Notes to Condensed Consolidated Financial Statements.
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RED ROBIN GOURMET BURGERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Recent Accounting Pronouncements
Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries ("Red Robin" or the "Company"), primarily operates, franchises, and develops full-service restaurants in North America. As of July 14, 2024, the Company owned and operated 411 restaurants located in 39 states. The Company also had 92 franchised full-service restaurants in 14 states and one Canadian province. The Company operates its business as one operating and one reportable segment.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Red Robin and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for any interim period are not necessarily indicative of results for the full year.
The accompanying Condensed Consolidated Financial Statements of Red Robin have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in the Company's annual Condensed Consolidated Financial Statements on Form 10-K have been condensed or omitted. The Condensed Consolidated Balance Sheet as of December 31, 2023 has been derived from the audited Condensed Consolidated Financial Statements as of that date but does not include all disclosures required for audited annual financial statements. For further information, please refer to and read these interim Condensed Consolidated Financial Statements in conjunction with the Company's audited Condensed Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC on February 28, 2024.
Our current, prior, and upcoming year periods, period end dates, and number of weeks included in the period are summarized in the table below:
Periods Period End Date Number of Weeks in Period
Current, Prior and Upcoming Fiscal Quarters:
First Quarter 2024
April 21, 2024 16
First Quarter 2023
April 16, 2023 16
Second Quarter 2024
July 14, 2024 12
Second Quarter 2023
July 9, 2023 12
Third Quarter 2024
October 6, 2024 12
Third Quarter 2023
October 1, 2023 12
Current and Prior Fiscal Years:
Fiscal Year 2024
December 29, 2024 52
Fiscal Year 2023
December 31, 2023 53
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Reclassifications
Certain amounts presented have been reclassified to conform with the current period presentation. The reclassifications had no effect on the Company's consolidated results. We made adjustments to the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) to disaggregate franchise and other revenue and to disaggregate interest expense and interest income and other, net. Additionally, we made adjustments to the Condensed Consolidated Statements of Cash Flows to disaggregate borrowings and repayments on revolving credit facilities, repayments on the term loan and finance lease obligations and to reclassify gift card breakage within unearned revenue.
Recently Issued and Recently Adopted Accounting Standards
In December 2023, FASB issued Update 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures which updates income tax disclosures related to the rate reconciliation and requires disclosure of income taxes paid by jurisdiction. The amendment also provides further disclosure comparability. The amendment is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied prospectively. However, retrospective application is permitted. We do not expect these amended disclosures will have a material impact to the Company's Consolidated Financial Statements or Notes to the Consolidated Financial Statements upon adoption.
In November 2023, FASB issued Update 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which updates reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments are effective for fiscal years beginning after December 15, 2023 and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. Management is currently evaluating this ASU to determine its impact on the Company's disclosures.
We reviewed all other recently issued accounting pronouncements and concluded they were either not applicable or not expected to have a significant impact on the Company's Condensed Consolidated Financial Statements.
Summary of Significant Accounting Policies
Revenue Recognition- Revenues consist of sales from restaurant operations (including third party delivery), franchise revenue, and other revenue including gift card breakage and miscellaneous revenue. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a restaurant Guest, franchisee, or other customer.
The Company recognizes revenues from restaurant operations when payment is tendered at the point of sale, as the Company's performance obligation to provide food and beverage to the customer has been satisfied.
The Company sells gift cards which do not have an expiration date, and it does not deduct dormancy fees from outstanding gift card balances. We recognize revenue from gift cards as either: (i) Restaurant revenue, when the Company's performance obligation to provide food and beverage to the customer is satisfied upon redemption of the gift card, or (ii) gift card breakage, as discussed below.
Gift card breakage is recognized when the likelihood of a gift card being redeemed by the customer is remote and the Company determines there is not a legal obligation to remit the unredeemed gift card balance to the relevant jurisdiction. The determination of the gift card breakage rate is based upon the Company's specific historical redemption patterns. The Company recognizes gift card breakage by applying its estimate of the rate of gift card breakage on a pro rata basis over the period of estimated redemption.
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During the second quarter of fiscal 2024, we re-launched our Red Robin RoyaltyTMprogram ("Royalty"). Under the re-launched program, Royalty members generally earn points for every dollar spent. We may also periodically offer promotions, which typically provide the customer with the opportunity to earn bonus points or other rewards. Upon reaching certain point thresholds, Royalty members earn rewards that may be redeemed for food and beverage items. Earned rewards generally expire 90 days after they are issued, and points generally expire if a qualifying purchase is not made within 365 days of the last purchase. We defer revenue based on the estimated stand-alone selling price of points or rewards earned by customers as each point or reward is earned, net of points or rewards we do not expect to be redeemed. Our estimate of points and rewards expected to be redeemed is based on historical Company-specific data. We evaluate Royalty redemption rates annually, or more frequently as circumstances warrant. Estimating future redemption rates requires judgment based on current and historical trends, and actual redemption rates may vary from our estimates.
Revenues we receive from our franchise arrangements include sales-based royalties, advertising fund contributions, and franchise fees. Red Robin franchisees are required to remit 4.0% to 5.0% of their revenues as royalties to the Company and contribute up to 3% of revenues to two national advertising funds. The Company recognizes these sales-based royalties and advertising fund contributions as the underlying franchisee sales occur. Contributions to these Advertising Funds from franchisees are recorded as revenue under Franchise revenue in the Consolidated Statements of Operations and Comprehensive Income (Loss) in accordance with ASC Topic 606, Revenue from Contracts with Customers.
The Company typically grants franchise rights to franchisees for a term of 20 years, with the right to extend the term for an additional 10 years if various conditions are satisfied by the franchisee.
Other revenue consists of gift card breakage, licensing income, and recycling income.
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2. Revenue
Disaggregation of revenue
In the following table, revenue is disaggregated by type of good or service (in thousands):
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023
Restaurant revenue $ 294,457 $ 293,281 $ 673,025 $ 700,174
Franchise revenue 4,287 3,544 9,628 8,826
Gift card breakage 1,025 533 5,188 5,342
Other revenue 385 1,290 854 2,118
Total revenues $ 300,154 $ 298,648 $ 688,695 $ 716,460
Contract Liabilities
Components of Unearned revenue in the Condensed Consolidated Balance Sheets are as follows (in thousands):
July 14, 2024 December 31, 2023
Unearned gift card revenue $ 14,899 $ 28,558
Unearned Royalty revenue
1,804 7,509
Unearned revenue
$ 16,703 $ 36,067
Revenue recognized in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the redemption and breakage of gift cards that were included in the liability balance at the beginning of the fiscal year was as follows (in thousands):
Twenty-Eight Weeks Ended
July 14, 2024 July 9, 2023
Gift card revenue $ 14,539 $ 16,038
We recognize Royalty revenue within Restaurant revenue in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) when a customer redeems an earned reward. Unearned revenue associated with Royalty is included in Unearned revenue in our Condensed Consolidated Balance Sheets.
Changes in our unearned revenue balance related to our Royalty program (in thousands):
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023
Unearned Royalty revenue, beginning balance
$ 8,032 $ 11,356 $ 7,509 $ 11,107
Revenue deferred 715 2,247 3,039 4,763
Revenue recognized(1)
(6,943) (1,980) (8,744) (4,247)
Unearned Royalty revenue, ending balance
$ 1,804 $ 11,623 $ 1,804 $ 11,623
(1)Restaurant revenue includes an approximately $6.4 million credit related to the transition to the new Royalty program in the second quarter of 2024, primarily due to the cancellation of unused points that were earned more than 365 days prior to the launch of the new program.
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3. Leases
The components of lease expense, including variable lease costs primarily consisting of common area maintenance charges and real estate taxes, are included in Occupancy on our Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) as follows (in thousands):
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023
Operating lease cost $ 17,412 $ 16,279 $ 40,418 $ 37,174
Finance lease cost:
Amortization of right of use assets 216 221 504 549
Interest on lease liabilities 106 111 243 284
Total finance lease cost $ 322 $ 332 $ 747 $ 833
Variable lease cost 4,538 4,477 10,441 10,269
Total $ 22,272 $ 21,088 $ 51,606 $ 48,276
Refer to Footnote 5, Other Charges (Gains), net, for information regarding the sale-leaseback transactions completed during the year to date periods ended July 14, 2024 and July 9, 2023, respectively.
4. Earnings (Loss) Per Share
Basic earnings (loss) per share amounts are calculated by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share amounts are calculated based upon the weighted-average number of shares of common stock and potentially dilutive shares of common stock outstanding during the period. Potentially dilutive shares are excluded from the computation in periods in which they have an anti-dilutive effect. Diluted earnings per share reflects the potential dilution that could occur if holders of options exercised their options into common stock. As the Company was in a net loss position for both the quarter to date and year to date periods ended July 14, 2024, all potentially dilutive common shares are considered anti-dilutive.
The Company uses the treasury stock method to calculate the effect of outstanding stock options and awards. Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands):
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023
Basic weighted average shares outstanding 15,680 16,037 15,608 16,014
Dilutive effect of stock options and awards - 254 - 353
Diluted weighted average shares outstanding 15,680 16,291 15,608 16,367
Awards excluded due to anti-dilutive effect on diluted income (loss) per share 1,996 560 1,668 577
5. Other Charges (Gains), net
Other charges (gains), net consisted of the following (in thousands):
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023
Gain on sale of restaurant property
$ - $ (14,586) $ (7,425) $ (14,586)
Litigation contingencies
356 1,240 776 5,540
Restaurant closure costs, net
423 (112) 597 1,638
Severance and executive transition
137 962 1,082 2,854
Asset impairment
1,128 1,693 1,128 2,387
Asset disposal and other, net
825 83 2,620 1,144
Closed corporate office costs, net of sublease income 62 113 177 175
Other charges (gains), net $ 2,931 $ (10,607) $ (1,045) $ (848)
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Gain on Sale of Restaurant Property
During the first quarter of fiscal 2024, the Company sold ten restaurant properties for total proceeds of $23.9 million in a sale-leaseback transaction that resulted in a gain, net of expenses of $7.4 million. During the second quarter of fiscal 2023, the Company sold nine restaurant properties for total proceeds of $28.5 million in a sale-leaseback transaction that resulted in a gain, net of expenses of $14.6 million.
Severance and Executive Transition
During the quarter and year to date periods of fiscal 2024, the Company incurred costs primarily related to a reduction in force of Team Members. During the second quarter and year to date periods of fiscal 2023, the Company incurred severance and executive transition costs associated with changes in leadership positions.
Asset Impairment
During the second quarter of fiscal 2024, the Company recognized non-cash impairment charges primarily related to the closure of two locations. During the second quarter and year to date periods of fiscal 2023, the Company recognized non-cash impairment charges primarily related to impairments of long-lived assets at four underperforming locations and the closed corporate office. See Note 7. Fair Value Measurements.
Asset Disposal and Other
Asset disposals and other relate primarily to terminated capital projects.
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6. Borrowings
Borrowings as of July 14, 2024 and December 31, 2023 are summarized below (in thousands):
July 14, 2024 Variable
Interest Rate 		December 31, 2023 Variable
Interest Rate
Term loan $ 167,911 12.10 % $ 189,143 11.62 %
Total borrowings 167,911 189,143
Less: unamortized debt issuance costs and discounts 5,602 6,549
Long-term debt $ 162,309 $ 182,594
Revolving line of credit unamortized deferred financing charges: $ 625 $ 752
Credit Agreement
On March 4, 2022, the Company entered into a credit agreement (the "Credit Agreement") by and among the Company, Red Robin International, Inc., as the borrower, the lenders from time to time party thereto, the issuing banks from time to time party thereto, Fortress Credit Corp., as Administrative Agent and as Collateral Agent and JPMorgan Chase Bank, N.A., as Sole Lead Arranger and Sole Bookrunner. The five-year $225.0 million Credit Agreement provides for a $25.0 million revolving line of credit and a $200.0 million term loan (collectively, the "Credit Facility"). The borrower maintains the option to increase the Credit Facility in the future, subject to lenders' participation, by up to an additional $40.0 million in the aggregate on the terms and conditions set forth in the Credit Agreement.
The Credit Facility will mature on March 4, 2027. No amortization is required with respect to the revolving Credit Facility. The term loans require quarterly principal payments in an aggregate annual amount equal to 1.0% of the original principal amount of the term loan. As of July 14, 2024, quarterly principal payments are no longer required as a result of the debt repayments from the proceeds of the recent sale-leaseback transactions. The Credit Agreement's interest rate references the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements and backed by U.S. Treasury securities, or the Alternate Base Rate, which represents the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.5% per annum, or (c) one-month term SOFR plus 1.0% per annum.
As of July 14, 2024, the Company had outstanding borrowings under the Credit Facility of $162.3 million, in addition to amounts issued under letters of credit of $7.7 million. As of December 31, 2023, the Company had outstanding borrowings under the Credit Facility of $182.6 million, in addition to amounts issued under letters of credit of $7.7 million.
Red Robin International, Inc., is the borrower under the Credit Agreement, and certain of its subsidiaries and the Company are guarantors of the borrower's obligations under the Credit Agreement. Borrowings under the Credit Agreement are secured by substantially all of the assets of the borrower and the guarantors, including the Company, and are available to: (i) refinance certain existing indebtedness of the borrower and its subsidiaries, (ii) pay any fees and expenses in connection with the Credit Agreement, and (iii) provide for the working capital and general corporate requirements of the Company, the borrower and its subsidiaries, including permitted acquisitions and capital expenditures, but excluding restricted payments.
On March 4, 2022, Red Robin International, Inc., the Company, and the guarantors also entered into a Pledge and Security Agreement (the "Security Agreement") granting to the Administrative Agent a first priority security interest in substantially all of the assets of the borrower and the guarantors to secure the obligations under the Credit Agreement.
Red Robin International, Inc. as the borrower is obligated to pay customary fees to the agents, lenders and issuing banks under the Credit Agreement with respect to providing, maintaining, or administering, as applicable, the credit facilities.
On July 17, 2023, the Company amended the Credit Agreement (the "Credit Agreement Amendment") to, among other things, remove the previously included $50.0 million aggregate cap on sale-leasebacks of Company-owned real property that are permitted under the Credit Agreement, subject to certain conditions set forth in the Credit Agreement.
The summary descriptions of the Credit Agreement, the Security Agreement, and the Credit Agreement Amendment do not purport to be complete and are qualified in their entirety by reference to the full text of each agreement, each of which was filed February 28, 2024, as an exhibit to the Annual Report on Form 10-K.
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7. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying amounts of the Company's cash and cash equivalents, accounts receivable, accounts payable, and current accrued expenses and other liabilities approximate fair value due to the short-term nature or maturity of the instruments.
The Company maintains a rabbi trust to fund obligations under a deferred compensation plan. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities and carried at fair value and are included in Other assets, net in the accompanying Condensed Consolidated Balance Sheets. Fair market value of mutual funds is measured using level 1 inputs (quoted prices for identical assets in active markets).
The following tables present the Company's assets measured at fair value on a recurring basis (in thousands):
July 14, 2024 Level 1 Level 2 Level 3
Assets:
Investments in rabbi trust $ 2,055 $ 2,055 $ - $ -
Total assets measured at fair value $ 2,055 $ 2,055 $ - $ -
December 31, 2023 Level 1 Level 2 Level 3
Assets:
Investments in rabbi trust $ 2,079 $ 2,079 $ - $ -
Total assets measured at fair value $ 2,079 $ 2,079 $ - $ -
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities recognized or disclosed at fair value in the Condensed Consolidated Financial Statements on a nonrecurring basis include items such as property, plant and equipment, right of use assets, and other intangible assets. These assets are measured at fair value if determined to be impaired.
During 2024 and 2023, the Company measured non-financial assets for impairment using continuing and projected future cash flows, which were based on significant inputs not observable in the market and thus represented a level 3 fair value measurement.
During the second quarter of fiscal 2024, we impaired long-lived assets at two restaurant locations that we closed during the quarter with a carrying value of approximately $3.1 million. We determined the fair value of these long-lived assets to be $0.9 million as a result of the closures, resulting in a $1.1 million impairment charge and a $1.1 million decrease in right of use assets due to remeasurement. During the first half of fiscal 2023, we impaired long-lived assets at four restaurant locations and the closed corporate office with carrying values of $12.4 million. We determined the fair value of these long-lived assets to be $10.0 million, resulting in impairment charges of $2.4 million during the quarter and year to date periods ended July 9, 2023.
Disclosures of Fair Value of Other Assets and Liabilities
The Company's liability under its credit facility is carried at historical cost in the accompanying Condensed Consolidated Balance Sheets. As of July 14, 2024, the fair value of the credit facility was approximately $168.3 million and the principal amount carrying value was $167.9 million. The credit facility term loan is reported net of $5.6 million in unamortized discount and debt issuance costs in the Condensed Consolidated Balance Sheet as of July 14, 2024. The carrying value of the credit facility was $189.1 million and the fair value of the credit facility was $186.9 million as of December 31, 2023. The interest rate on the credit facility represents a level 2 fair value input.
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8. Commitments and Contingencies
Because litigation is inherently unpredictable, assessing contingencies related to litigation is a complex process involving highly subjective judgment about potential outcomes of future events. When evaluating litigation contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the availability of appellate remedies, insurance coverage related to the claim or claims in question, the presence of complex or novel legal theories, and the ongoing discovery and development of information important to the matter. In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated, or unrelated to possible outcomes, and as such are not meaningful indicators of our potential liability or financial exposure. Accordingly, we review the adequacy of accruals and disclosures each quarter in consultation with legal counsel, and we assess the probability and range of possible losses associated with contingencies for potential accrual in the Condensed Consolidated Financial Statements. However, the ultimate resolution of litigated claims may differ from our current estimates.
As of July 14, 2024, we had reserves of $8.1 million for loss contingencies included within Accrued liabilities and other on our Condensed Consolidated Balance Sheet. In the normal course of business, there are various claims in process, matters in litigation, administrative proceedings, and other contingencies. These include employment related claims and class action lawsuits, claims from Guests or Team Members alleging illness, injury, food quality, health, or operational concerns, and lease and other commercial disputes. To date, none of these claims, certain of which are covered by insurance policies, have had a material effect on the Company. While it is not possible to predict the outcome of these suits, legal proceedings, and claims with certainty, management is of the opinion that adequate provision for potential losses associated with these matters has been made in the financial statements and that the ultimate resolution of these matters will not have a material adverse effect on our financial position and results of operations. However, a significant increase in the number of these claims, or one or more successful claims resulting in greater liabilities than we currently anticipate, could materially and adversely affect our business, financial condition, results of operations, and cash flows.
As of July 14, 2024, we had non-cancellable purchase commitments primarily related to certain vendors who provide food and beverage and other supplies to our restaurants, for an aggregate of $202.2 million. We expect to fulfill our commitments under these agreements in the normal course of business, and as such, no liability has been recorded.
9. Subsequent Events
Subsequent to the second quarter of fiscal 2024, the Company entered into the Second Amendment to our Credit Agreement (the "Second Amendment"). The Second Amendment amends the Credit Agreement to, among other things:
•increase the required Maximum Net Total Leverage Ratio beginning in the third fiscal quarter of 2024 through the third fiscal quarter of 2025;
•increase the aggregate revolving commitments by $15.0 million to $40.0 million on the Second Amendment effective date through the third fiscal quarter of 2025;
•remove the variable Pricing Grid and increase the Applicable Margin on all Term Loans and Revolving Facility Loans that are SOFR Loans to 7.50% per annum and that are ABR Loans to 6.50% per annum;
•add certain additional reporting requirements.
In conjunction with the Second Amendment, the Company paid certain customary amendment fees to the lenders under the credit facility totaling approximately $2.9 million. Terms in this section that are capitalized but not defined have the meanings given to them in the Second Amendment. The summary description of the Second Amendment does not purport to be complete and is qualified in its entirety to the full text of the Second Amendment, which is attached hereto as Exhibit 10.6 and is incorporated by reference herein.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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. References to the second quarter and year to date periods of fiscal 2024 and fiscal 2023 refer to the twelve and twenty-eight weeks ended July 14, 2024 and July 9, 2023, respectively.
Description of Business
Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries ("Red Robin," "we," "us," "our," or the "Company"), primarily operates, franchises, and develops full-service restaurants with 503 locations in North America. As of July 14, 2024, the Company owned 411 restaurants located in 39 states, and had 92 franchised restaurants in 14 states and one Canadian province. 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.
Highlights for the Second Quarter of Fiscal 2024, Compared to the Second Quarter of Fiscal 2023:
•Total revenues are $300.2 million, an increase of $1.5 million.
•Comparable restaurant revenue(1)declined 0.8% excluding a deferred revenue benefit led by the change in the Company's loyalty program. Including this benefit, Comparable restaurant revenue(1)increased 1.4%.
•Net loss is $9.5 million, compared to net income of $3.9 million last year.
•Adjusted EBITDA(2)is $11.8 million compared to $15.5 million last year.
•Subsequent to the close of the second quarter, executed an amendment to the credit agreement that revises financial covenants and expands revolver capacity.
Highlights for the Year to Date Period of Fiscal 2024, Compared to the Year to Date Period of Fiscal 2023:
•Total revenues are $688.7 million, a decrease of $27.8 million.
•Comparable restaurant revenue(1)declined 4.0% excluding a deferred revenue benefit led by the change in the Company's loyalty program. Including this benefit, Comparable restaurant revenue(1)declined 3.2%.
•Net loss is $18.9 million, compared to net income of $0.7 million last year.
•Adjusted EBITDA(2)is $24.0 million compared to $51.9 million last year.
•Completed a sale-leaseback transaction for ten restaurants in the first quarter of fiscal 2024, generating net proceeds of approximately $23.3 million and a gain, net of expenses of $7.4 million.
(1) Comparable restaurant revenue represents revenue from Company-owned restaurants that have operated for 18 months as of the beginning of the period presented.
(2) See below for a reconciliation of Adjusted EBITDA to Net income (loss).
Key Performance Indicators
Restaurant Revenue, compared to the same quarter in the prior year, is presented in the table below:
(Dollars in millions) Twelve Weeks Ended Twenty-Eight Weeks Ended
Restaurant Revenue for the period ended July 9, 2023
$ 293.3 $ 700.2
Increase/(decrease) in comparable restaurant revenue 4.1 (21.5)
Decrease in non-comparable and closed restaurant revenue
(2.9) (5.7)
Total increase/(decrease) 1.2 (27.2)
Restaurant Revenue for the period ended July 14, 2024
$ 294.5 $ 673.0
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Restaurant Data
The following table details restaurant unit data for our Company-owned and franchised locations for the periods presented:
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023
Company-owned:
Beginning of period 413 415 415 414
Opened during the period - - - 1
Acquired from franchisees - 5 - 5
Closed during the period (2) (2) (4) (2)
End of period 411 418 411 418
Franchised:
Beginning of period 92 96 92 97
Opened during the period - - - -
Closed during the period - - - (1)
Sold to Company during the period - (5) - (5)
End of period 92 91 92 91
Total number of restaurants 503 509 503 509
Comparable Restaurant Revenue
As of the first quarter of fiscal 2024, the Company revised its definition of comparable restaurant revenue to reflect Company-owned restaurants that have operated for 18 months as of the beginning of the period presented. The prior definition included Company-owned restaurants that have operated for five full quarters as of the beginning of the period presented. The Company believes this change will provide investors with a better understanding of our financial performance from period to period. The change did not have a material impact on previously reported results and as such, prior periods were not revised to reflect the new definition.
For the second quarter and year to date periods of fiscal 2024, there were 405 and 404 comparable restaurants, respectively.
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The following table presents total Company-owned and franchised restaurants by state or province as of July 14, 2024:
Company-Owned Restaurants Franchised Restaurants
State:
Arkansas 2 1
Alaska 3
Alabama 4
Arizona 18 1
California 57
Colorado 22
Connecticut 3
Delaware 5
Florida 17
Georgia 6
Iowa 5
Idaho 8
Illinois 17
Indiana 11
Kansas 5
Kentucky 4
Louisiana 1
Massachusetts 5
Maryland 11
Maine 2
Michigan 19
Minnesota 4
Missouri 8 3
Montana 1
North Carolina 17
Nebraska 4
New Hampshire 3
New Jersey 11 1
New Mexico 3
Nevada 6
New York 14
Ohio 16 3
Oklahoma 5
Oregon 15 5
Pennsylvania 11 20
Rhode Island 1
South Carolina 4
South Dakota 1
Tennessee 9
Texas 18 9
Utah 1 5
Virginia 19
Washington 37
Wisconsin 11
Province:
British Columbia 11
Total 411 92
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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 2023 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 Twenty-Eight Weeks Ended
(Dollars in thousands) July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023
Revenues:
Restaurant revenue 98.1 % 98.2 % 97.7 % 97.7 %
Franchise revenue 1.4 1.2 1.4 1.2
Other revenue 0.5 0.6 0.9 1.1
Total revenues 100.0 100.0 100.0 100.0
Costs and expenses:
Restaurant operating costs (1)(excluding depreciation and amortization shown separately below):
Cost of sales 23.6 24.3 23.7 24.4
Labor 38.7 37.4 39.1 36.4
Other operating 17.6 17.7 17.6 17.7
Occupancy 8.4 8.0 8.3 7.6
Total restaurant operating costs 88.1 87.3 88.6 86.1
Depreciation and amortization 4.5 5.3 4.6 5.2
Selling, general, and administrative expenses 9.5 9.0 9.9 8.6
Pre-opening costs - - - 0.1
Other charges (gains), net 1.0 (3.6) (0.2) (0.1)
Income (loss) from operations (1.5) 3.4 (1.0) 2.0
Other expense (income):
Interest expense 1.7 2.3 1.8 2.1
Interest income and other, net - (0.2) (0.1) (0.1)
Income (loss) before income taxes (3.2) 1.4 (2.7) 0.1
Income tax provision (benefit) - 0.1 - -
Net income (loss) (3.2) % 1.3 % (2.8) % 0.1 %
(1) Expressed as a percentage of restaurant revenue.
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Revenues
Twelve Weeks Ended Twenty-Eight Weeks Ended
(Dollars in thousands) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change
Restaurant revenue $ 294,457 $ 293,281 0.4 % $ 673,025 $ 700,174 (3.9) %
Franchise revenue 4,287 3,544 21.0 % 9,628 8,826 9.1 %
Other revenue 1,410 1,823 (22.7) % 6,042 7,460 (19.0) %
Total revenues $ 300,154 $ 298,648 0.5 % $ 688,695 $ 716,460 (3.9) %
Average weekly net sales volumes in Company-owned restaurants $ 59,498 $ 58,477 1.7 % $ 58,220 $ 60,124 (3.2) %
Total operating weeks 4,949 5,018 (1.4) % 11,560 11,648 (0.8) %
Restaurant revenue, which comprises primarily food and beverage sales, increased $1.2 million, or 0.4%, in the second quarter of fiscal 2024, as compared to the comparable period of 2023. Restaurant revenue increased primarily due to a benefit resulting from a change in the Company's loyalty program. Excluding this benefit, comparable restaurant revenue declined 0.8%. Including this benefit, comparable restaurant revenue increased 1.4%. Comparable restaurant revenue reflects a 6.7%decrease in Guest count, offset in part by a 5.9%increase in average Guest check. The increase in average Guest check resulted from a 7.6%increase in menu prices, partially offset by a 0.9%decrease from menu mix and a0.8% decrease from discounts. The decrease in menu mix was primarily driven by Guests shifting visits from third party delivery platforms with elevated menu prices, to dine in visits at standard menu prices, and reduced incidence of add on menu items. Dine-in sales comprised 76.8% of total food and beverage sales during the second quarterof 2024, as compared to 74.7% in the same period in 2023.
Restaurant revenue decreased $27.1 millionor 3.9% in the year to date period of fiscal 2024, as compared to the same period of 2023. Restaurant revenue decreased primarily due to a 4.0% decrease in comparable restaurant revenue led by the change in the Company's loyalty program. Including the benefit of loyalty adjustments, comparable restaurant revenue decreased 3.2%. Comparable restaurant revenue reflects an 8.3% decrease in Guest count, partially offset by a 4.3% increase in average Guest check. The decrease in Guest count is due in part to overlapping elevated performance in the first quarter of fiscal 2023, our exit of virtual brands in the third quarter of fiscal 2023, and adverse weather impacts during the first quarter of fiscal 2024. The increase in average Guest check resulted from a 6.4% increase in menu prices, partially offset by a 1.4% decrease from menu mix and a 0.7% decrease from discounts. The decrease in menu mix was primarily driven by Guests shifting visits from third party delivery platforms with elevated menu prices, to dine in visits at standard menu prices, and reduced incidence of add on menu items. Dine-in sales comprised 76.4% of total food and beverage sales during the year to date period of 2024, as compared to 71.4% in the same period in 2023.
Average weekly net sales volumes are calculated as 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.
Franchise revenue increased by $0.7 million, or 21.0%, in the second quarter of fiscal 2024 compared to the same period of 2023, primarily due to an increase in franchisee contributions. The increase in 2024 follows a reduction in 2023, and returns franchisee contributions to their typical historical level. Franchise restaurants reported a decrease of 1.7% in comparable restaurant revenue in the second quarter of fiscal 2024 and a decrease of 3.2% for the year to date period of fiscal 2024 compared to the same periods in fiscal 2023.
Other revenue decreased $0.4 million and $1.4 million in the second quarter and year to date periods of fiscal 2024 compared to 2023, primarily related to business interruption insurance recoveries recognized in 2023.
Cost of Sales
Twelve Weeks Ended Twenty-Eight Weeks Ended
(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change
Cost of sales $ 69,444 $ 71,372 (2.7) % $ 159,653 $ 171,042 (6.7) %
As a percent of restaurant revenue 23.6 % 24.3 % (0.7) % 23.7 % 24.4 % (0.7) %
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 70 basis points for the second quarter of fiscal 2024 as compared to the comparable period in 2023. The improvement was primarily driven by menu price increases and implementation of various cost savings initiatives, partially offset by negative product mix and commodity inflation.
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Cost of sales as a percentage of restaurant revenue decreased 70 basis points for the year to date period of fiscal 2024 as compared to the comparable period in 2023. The improvement was primarily driven by menu price increases and implementation of various cost savings initiatives, partially offset by product mix shifts to higher cost menu items and commodity inflation.
Labor
Twelve Weeks Ended Twenty-Eight Weeks Ended
(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change
Labor $ 113,908 $ 109,678 3.9 % $ 262,866 $ 255,100 3.0 %
As a percent of restaurant revenue 38.7 % 37.4 % 1.3 % 39.1 % 36.4 % 2.7 %
Labor costs include restaurant level hourly wages and management salaries as well as related taxes and benefits. For the second quarter of fiscal 2024, labor as a percentage of restaurant revenue increased 130 basis points compared to the same period in 2023. The increase was primarily driven by strategic investments in hourly and management labor, increased incentive compensation related to a new partner bonus plan, and higher group health insurance costs.
For the year to date period of fiscal 2024, labor as a percentage of restaurant revenue increased 270 basis points compared to the same period in 2023. The increase was primarily driven by strategic investments in hourly and management labor, increased incentive compensation related to a new partner bonus plan, and higher workers compensation and group health insurance costs.
Other Operating
Twelve Weeks Ended Twenty-Eight Weeks Ended
(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change
Other operating $ 51,783 $ 51,842 (0.1) % $ 118,273 $ 123,892 (4.5) %
As a percent of restaurant revenue 17.6 % 17.7 % (0.1) % 17.6 % 17.7 % (0.1) %
Other operating costs include costs such as repair and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs. For the second quarter of fiscal 2024, other operating costs as a percentage of restaurant revenue decreased 10 basis points as compared to the comparable period in 2023. The decrease was primarily driven by reduced third party commission expenses associated with lower off premise mix and lower commission rates, partially offset by higher utilities costs.
For the year to date period of fiscal 2024, other operating costs as a percentage of restaurant revenue decreased 10 basis points as compared to the comparable period in 2023. The decrease was primarily driven by reduced third party commission expenses associated with lower off premise mix and lower commission rates.
Occupancy
Twelve Weeks Ended Twenty-Eight Weeks Ended
(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change
Occupancy $ 24,595 $ 23,482 4.7 % $ 56,023 $ 53,283 5.1 %
As a percent of restaurant revenue 8.4 % 8.0 % 0.4 % 8.3 % 7.6 % 0.7 %
Occupancy costs include fixed rents, property taxes, common area maintenance charges, general liability insurance, contingent rents, and other property costs. Occupancy costs as a percentage of restaurant revenue increased 40 basis points for the second quarter of fiscal 2024 compared to the comparable period in 2023. The increase is due to the impact of an increase in fixed rents related to the sale-leaseback of 28 locations.
Occupancy costs as a percentage of restaurant revenue increased 70 basis points for the year to date period of fiscal 2024 compared to the comparable period in 2023. The increase is due to the impact of an increase in fixed rents related to the sale-leaseback of 28 locations and the acquisition of five restaurants from a franchisee in the second quarter of fiscal 2023.
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Depreciation and Amortization
Twelve Weeks Ended Twenty-Eight Weeks Ended
(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change
Depreciation and amortization $ 13,402 $ 15,756 (14.9) % $ 31,556 $ 37,581 (16.0) %
As a percent of total revenues 4.5 % 5.3 % (0.8) % 4.6 % 5.2 % (0.6) %
Depreciation and amortization include depreciation on capital expenditures for restaurants and corporate assets as well as amortization of reacquired franchise rights, leasehold interests, and certain liquor licenses. For the second quarter of fiscal 2024, depreciation and amortization expense as a percentage of revenue decreased 80 basis points compared to the comparable period in 2023, primarily due to asset impairments and sale-leaseback transactions reducing the depreciable asset base.
For the year to date period of fiscal 2024, depreciation and amortization expense as a percentage of revenue decreased 60 basis points compared to the comparable period in 2023, primarily due to asset impairments and sale-leaseback transactions reducing the depreciable asset base.
Selling, General, and Administrative
Twelve Weeks Ended Twenty-Eight Weeks Ended
(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change
Selling, general, and administrative $ 28,652 $ 26,864 6.7 % $ 68,041 $ 61,387 10.8 %
As a percent of total revenues 9.5 % 9.0 % 0.5 % 9.9 % 8.6 % 1.3 %
Selling, general, and administrative costs include all corporate and administrative functions. Components of this category include marketing and advertising costs; restaurant support center, regional, and franchise support salaries and benefits; travel; professional and consulting fees; corporate information systems; legal expenses; office rent; training; and Board of Directors' expenses. Selling, general and administrative expense increased $1.8 million, or 6.7% in the second quarter of fiscal 2024 as compared to the comparable period in 2023.
General and administrative costs in the second quarter of fiscal 2024 were $16.6 million, a decrease of $3.5 million compared to the comparable period in 2023. The decrease is primarily related to reduced incentive compensation accruals as compared to the prior year quarter.
Selling costs in the second quarter of fiscal 2024 were $12.0 million, an increase of $5.3 million compared to the comparable period in 2023. The increase was primarily driven by increased marketing communication with consumers and related production costs.
General and administrative costs in the year to date period of fiscal 2024 were $42.5 million, a decrease of $3.8 million compared to the comparable period in 2023. The decrease is primarily related to reduced incentive compensation accruals as compared to the same period last year, partially offset by higher benefit costs.
Selling costs in the year to date period of fiscal 2024 were $25.6 million, an increase of $10.5 million compared to the comparable period in 2023. The increase was primarily driven by increased marketing communication with consumers and related production costs.
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Pre-opening Costs
Twelve Weeks Ended Twenty-Eight Weeks Ended
(In thousands, except percentages) July 14, 2024 July 9, 2023 Percent Change July 14, 2024 July 9, 2023 Percent Change
Pre-opening costs $ - $ 4 (100.0) % $ - $ 586 (100.0) %
As a percent of total revenues - % - % - % - % 0.1 % (0.1) %
Pre-opening costs, which are expensed as incurred, comprise the costs related to preparing restaurants to introduce Donatos®and other initiatives, as well as direct costs, including labor, occupancy, training, and marketing, incurred related to opening new restaurants and hiring the initial work force. Our pre-opening costs fluctuate from period to period, depending upon, but not limited to, the number of restaurants where Donatos®has been introduced, the number of restaurant openings, the size of the restaurants being opened, and the location of the restaurants. Pre-opening costs for any period will typically include expenses associated with restaurants opened during the period as well as expenses related to restaurants opening in subsequent periods.
We did not open any new restaurants or roll out any Donatos®locations in the first half of fiscal 2024. We opened one restaurant and completed the rollout of 25 Donatos®locations in the first half of fiscal 2023.
Interest Expense
Interest expense for the second quarter of fiscal 2024 and 2023 was $5.1 million and $6.5 million, respectively. The $1.4 million decrease was primarily due to the $29.6 million repayment of debt with the proceeds from the sale-leaseback transactions subsequent to the second quarter of fiscal 2023, partially offset by an increase in the weighted average interest rate to 13.6% in the second quarter of fiscal 2024 compared to 11.1% in the prior year quarter. Average outstanding debt was $175.2 million and $207.1 million as of July 14, 2024 and July 9, 2023, respectively.
Interest expense was $12.6 million for the year to date period of fiscal 2024 and $14.3 million for the year to date period of fiscal 2023. The $1.7 million decrease was primarily due to the $29.6 million repayment of debt with the proceeds from the sale-leaseback transactions subsequent to the second quarter of fiscal 2023, partially offset by an increase in the weighted average interest rate to 13.5% for the year to date period of fiscal 2024 compared to 12.3% in the same period last year. Average outstanding debt was $175.2 million and $210.7 million as of July 14, 2024 and July 9, 2023, respectively.
Income Tax Provision
The effective tax rate for the second quarter of fiscal 2024 was a 0.4% benefit, compared to a 3.8% expense for the second quarter of fiscal 2023. The effective tax rate for the year to date period of fiscal 2024 was 0.7%, compared to 21.0% for the year to date period of fiscal 2023. The effective tax rate for the quarter and year to date periods of fiscal 2024 reflects the valuation allowance recorded against the Company's net tax assets in addition to certain federal and state income taxes due to attribute limitations, minimum state income taxes, and state franchise taxes. The increase in tax rate for the fiscal 2023 periods as compared to the fiscal 2024 periods is due to the near break-even pretax book income generated in fiscal 2023.
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Non-GAAP Financial Measures
Restaurant revenue and operating costs, and restaurant level operating profit for the periods presented are detailed in the table below:
Twelve Weeks Ended Twenty-Eight Weeks Ended
(Dollars in millions) July 14, 2024 July 9, 2023 Increase/
(Decrease) 		July 14, 2024 July 9, 2023 Increase/
(Decrease)
Restaurant revenue $ 294.5 $ 293.3 0.4 % $ 673.0 $ 700.2 (3.9) %
Restaurant operating costs:
Cost of sales 69.4 71.4 (2.8) % 159.7 171.0 (6.6) %
Labor 113.9 109.7 3.8 % 262.9 255.1 3.1 %
Other operating 51.8 51.8 - % 118.3 123.9 (4.5) %
Occupancy 24.6 23.5 4.7 % 56.0 53.3 5.1 %
Total Restaurant Operating Costs $ 259.7 $ 256.4 1.3 % $ 596.9 $ 603.3 (1.1) %
Restaurant level operating profit(1)
$ 34.8 $ 36.9 (5.7) % $ 76.1 $ 96.9 (21.5) %
(1)Restaurant level operating profit is a non-GAAP measure. See below for a reconciliation of restaurant level operating profit to income from operations and income from operations as a percentage of total revenues.
Twelve Weeks Ended Twenty-Eight Weeks Ended
(Dollars in millions) July 14, 2024 July 9, 2023 Increase/
(Decrease) 		July 14, 2024 July 9, 2023 Increase/(Decrease)
Restaurant revenue $ 294.5 $ 293.3 0.4 % $ 673.0 $ 700.2 (3.9) %
Restaurant operating costs: (Percentage of Restaurant Revenue) (Basis
Points) 		(Percentage of Restaurant Revenue) (Basis
Points)
Cost of sales 23.6 % 24.3 % (70) 23.7 % 24.4 % (70)
Labor 38.7 37.4 130 39.1 36.4 270
Other operating 17.6 17.7 (10) 17.6 17.7 (10)
Occupancy 8.4 8.0 40 8.3 7.6 70
Total Restaurant Operating Costs 88.1 % 87.3 % 80 88.6 % 86.1 % 250
Restaurant level operating profit
11.8 % 12.6 % (80) 11.3 % 13.8 % (250)
Certain percentage and basis point 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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The following table summarizes net income (loss), income (loss) per diluted share, and adjusted income (loss) per diluted share for the periods presented:
Twelve Weeks Ended Twenty-Eight Weeks Ended
(in thousands, except per share amounts) July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023
Net income (loss) as reported $ (9,489) $ 3,922 $ (18,949) $ 664
Income (loss) per share - diluted:
Net income (loss) as reported
$ (0.61) $ 0.24 $ (1.21) $ 0.04
Other charges (gains), net:
Gain on sale of restaurant property - (0.91) (0.48) (0.89)
Litigation contingencies 0.02 0.08 0.05 0.34
Restaurant closure costs, net 0.03 (0.01) 0.04 0.10
Severance and executive transition 0.01 0.06 0.07 0.17
Asset impairment 0.07 0.11 0.07 0.15
Asset disposal and other, net
0.05 0.01 0.17 0.07
Closed corporate office costs, net of sublease income - 0.01 0.01 0.01
Income tax effect (0.05) 0.17 0.02 0.01
Adjusted income (loss) per share - diluted $ (0.47) $ (0.24) $ (1.26) $ -
Weighted average shares outstanding:
Basic 15,680 16,037 15,608 16,014
Diluted 15,680 16,291 15,608 16,367
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The following table summarizes Net loss, EBITDA, and Adjusted EBITDA for the periods presented (in thousands):
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023
Net income (loss) as reported $ (9,489) $ 3,922 $ (18,949) $ 664
Interest expense, net 4,997 6,305 12,311 13,881
Income tax provision (benefit) (40) 156 141 176
Depreciation and amortization 13,402 15,756 31,556 37,581
EBITDA 8,870 26,139 25,059 52,302
Other charges (gains), net:
Gain on sale of restaurant property - (14,586) (7,425) (14,586)
Litigation contingencies 356 1,240 776 5,540
Restaurant closure costs, net 423 (112) 597 1,638
Severance and executive transition 137 962 1,082 2,854
Asset impairment 1,128 1,693 1,128 2,387
Asset disposal and other, net
825 83 2,620 1,144
Closed corporate office costs, net of sublease income 62 113 177 175
Adjusted EBITDA $ 11,801 $ 15,532 $ 24,014 $ 51,454
We define EBITDA as net income (loss) before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA and Adjusted income (loss) per share-diluted are supplemental measures of our performance that are not required by or presented in accordance with GAAP. We believe these non-GAAP measures give the reader additional insight into the ongoing operational results of the Company and are intended to supplement the presentation of the Company's financial results in accordance with GAAP. Adjusted EBITDA and adjusted income (loss) per share-diluted exclude the impact of non-operating or nonrecurring items including changes in estimates, asset impairments, litigation contingencies, gains (losses) on debt extinguishment, restaurant and office closure costs, gains on sale leaseback transactions, severance and executive transition costs and other non-recurring, non-cash or discrete items net of income tax impacts. Other companies may define these non-GAAP measures differently, and as a result our measures may not be directly comparable to those of other companies. Adjusted income (loss) per share-diluted and Adjusted EBITDA should be considered in addition to, and not as a substitute for, net income (loss) as reported in accordance with U.S. GAAP as a measure of performance.
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The following table summarizes income (loss) from operations and restaurant level operating profit for the periods presented (dollars in thousands):
Twelve Weeks Ended Twenty-Eight Weeks Ended
July 14, 2024 July 9, 2023 July 14, 2024 July 9, 2023
Income (loss) from operations $ (4,561) (1.5)% $ 10,257 3.4% $ (6,672) (1.0)% $ 14,437 2.0%
Less:
Franchise revenue 4,287 1.4% 3,544 1.2% 9,628 1.4% 8,826 1.2%
Other revenue 1,410 0.5% 1,823 0.6% 6,042 0.9% 7,460 1.1%
Add:
Other charges (gains), net 2,931 1.0 (10,607) (3.6) (1,045) (0.2) (848) (0.1)
Pre-opening costs - - 4 - - - 586 0.1
Selling 12,040 4.0 6,752 2.3 25,587 3.7 15,129 2.1
General and administrative expenses 16,612 5.5 20,111 6.7 42,454 6.2 46,258 6.5
Depreciation and amortization 13,402 4.5 15,756 5.3 31,556 4.6 37,581 5.2
Restaurant level operating profit $ 34,727 11.8% $ 36,907 12.6% $ 76,210 11.3% $ 96,857 13.8%
Income (loss) from operations as a percentage of total revenues (1.5)% 3.4% (1.0)% 2.0%
Restaurant level operating profit margin (as a percentage of restaurant revenue) 11.8% 12.6% 11.3% 13.8%
The Company believes restaurant level operating profit is an important measure for management and investors because it is widely regarded in the restaurant industry as a useful metric by which to evaluate restaurant level operating efficiency and performance. The Company defines restaurant level operating profit to be income from operations less franchise revenue and other revenue, plus other charges (gains), net, pre-opening costs, selling costs, general and administrative expenses, and depreciation and amortization. The measure includes restaurant level occupancy costs that include fixed rents, percentage rents, common area maintenance charges, real estate and personal property taxes, general liability insurance, and other property costs, but excludes depreciation and amortization expense, substantially all of which is related to restaurant level assets, because such expenses represent historical sunk costs which do not reflect current cash outlay for the restaurants. The measure also excludes costs associated with selling, general, and administrative functions, and pre-opening costs, as well as, other charges (gains), net because these costs are non-operating or nonrecurring and therefore not related to the ongoing operations of its restaurants. Restaurant level operating profit is not a measurement determined in accordance with GAAP and should not be considered in isolation, or as an alternative, to income (loss) from operations as an indicator of financial performance. Restaurant level operating profit as presented may not be comparable to other similarly titled measures of other companies in the Company's industry.
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Liquidity and Capital Resources
Cash and cash equivalents, and restricted cash decreased $0.4 million to $31.1 million as of July 14, 2024, from $31.6 million at the beginning of the fiscal year. The Company is using available cash flow from operations to maintain existing restaurants and infrastructure, and execute on its long-term strategic initiatives. As of July 14, 2024, the Company had approximately $48.1 million in liquidity, including cash and cash equivalents and $25.0 million available borrowing capacity under our Credit Facility.
Cash Flows
The table below summarizes our cash flows from operating, investing, and financing activities for each period presented (in thousands):
Twenty-Eight Weeks Ended
July 14, 2024 July 9, 2023
Net cash provided by operating activities $ 14,246 $ 18,225
Net cash provided by (used in) investing activities 9,415 (98)
Net cash used in financing activities (24,097) (20,086)
Effect of exchange rate changes on cash (2) -
Net change in cash and cash equivalents, and restricted cash $ (438) $ (1,959)
Operating Cash Flows
Net cash flows provided by operating activities decreased $4.0 million to $14.2 million for the first half of fiscal 2024 compared to $18.2 million for the comparable period in fiscal 2023. The decrease in net cash provided by operating activities is primarily attributable to the decrease in restaurant level profitability.
Investing Cash Flows
Net cash flows provided by investing activities increased to $9.4 million for the first half of fiscal 2024, as compared to net cash flows used in investing activities of $0.1 million for the comparable period in fiscal 2023. The $9.5 million increase in cash flows provided by investing activities is primarily due to reduction in current year capital expenditures and lower proceeds from sale lease-back transactions in the current year period. In addition, cash used in investing activities in the prior year included a $3.5 million cash outflow for the acquisition of five franchised restaurants.
The following table lists the components of our capital expenditures for the periods presented (in thousands):
Twenty-Eight Weeks Ended
July 14, 2024 July 9, 2023
Restaurant improvement capital and other $ 7,485 $ 12,045
Technology, infrastructure, and other 6,371 5,066
Donatos®expansion
- 7,440
New restaurants and restaurant refreshes - 1,263
Total capital expenditures $ 13,856 $ 25,814
Financing Cash Flows
Net cash flows used in financing activities increased to $24.1 million for the first half of fiscal 2024, as compared to $20.1 million for the comparable period in fiscal 2023. The increase in cash flows used in financing activities primarily relates to a $21.2 million repayment of outstanding debt with sale-leaseback transaction proceeds in fiscal 2024 compared to a $15.5 million repayment of outstanding of debt with sale-leaseback transaction proceeds in fiscal 2023.
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Credit Facility
On March 4, 2022, the Company entered into a credit agreement (the "Credit Agreement"), which provides for a Senior Secured Term Loan and Revolving Credit Facility (the "Credit Facility"). The Credit Agreement's interest rate references the Secured Overnight Financing Rate ("SOFR"), a new index calculated by short-term repurchase agreements and backed by U.S. Treasury securities, or the Alternate Base Rate, which represents the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.5% per annum, or (c) one-month term SOFR plus 1.0% per annum.
As of July 14, 2024, the Company had outstanding borrowings under the Credit Facility of $162.3 million net of $5.6 million of unamortized deferred financing charges and discounts, none of which was classified as current. As of July 14, 2024, the Company had $25.0 million of available borrowing capacity under its Credit Facility and $7.7 million of letters of credit issued against cash collateral. The Company's cash collateral is reported in Restricted cash on our Condensed Consolidated Balance Sheets.
On August 21, 2024, the Company entered into the second amendment to our Credit Agreement (the "Second Amendment"). The Second Amendment among other things: provides certain relief from the financial covenant by increasing the required maximum net total leverage ratio beginning in the third quarter of 2024 through the third quarter of 2025; increases the aggregate revolving commitments by $15.0 million to $40.0 million through the third quarter of 2025; removes the variable pricing grid and increases the applicable margin on all term loans and revolving loans that are SOFR-based loans to 7.50% per annum and that are ABR-based loans to 6.50% per annum; and adds certain additional reporting requirements.
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 well as a net total leverage ratio covenant, as defined, that adjusts periodically as specified in the Second Amendment to our Credit Agreement. As of July 14, 2024, we were in compliance with all debt covenants.
Additionally, as noted under "Credit Facility" above, the Second Amendment increased the required maximum net total leverage ratio covenant from the third quarter of 2024 through the third quarter of 2025.
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 borrowing capacity under the Credit Facility, as amended by the Second Amendment, and cash on hand, will be sufficient to meet our anticipated cash requirements and fund capital expenditures over the next 12 months.
Share Repurchase
On August 9, 2018, the Company's board of directors authorized the Company's current share repurchase program of up to a total of $75.0 million of the Company's common stock. The share repurchase authorization will terminate upon completing repurchases of $75.0 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 through July 14, 2024, we have repurchased a total of 1,088,588 shares at an average price of $15.18 per share for an aggregate amount of $16,520,000. The Company completed no share repurchases during the quarter and year to date periods ended July 14, 2024. Accordingly, as of July 14, 2024, we had $58.5 million of availability under the current share repurchase program. Our Credit Agreement limits our ability to repurchase shares to certain conditions set forth by the lenders in the Credit Facility.
Seasonality
Our business is subject to seasonal fluctuations. Sales in most of our restaurants were historically higher during the spring months and winter holiday season due to factors including our retail-oriented locations and family appeal. As a result, our quarterly operating results may fluctuate significantly as a result of seasonality, and seasonality of sales may shift over time. Accordingly, results for any one quarter or year are not necessarily indicative of results to be expected for any other quarter or for any year.
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Contractual Obligations
There were no other material changes outside the ordinary course of business to our contractual obligations since the filing of the 2023 Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Refer to Footnote 8. Commitments and Contingencies.
Critical Accounting Estimates
Critical accounting 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 potentially unknown future events, and we might obtain different results if we use different assumptions or conditions. We had no significant changes in our critical accounting estimates which were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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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 Securities Exchange Act of 1934, as amended (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," "would," and similar expressions. Forward-looking statements in this report relate to, among other things: (i) our business objectives and strategic plans; (ii) working capital, and the ability of our future cash flows from restaurant operations and our borrowing capacity to satisfy future working capital deficits and capital expenditures; (iii) our share repurchase program; (iv) our expectations about restaurant operating costs, including commodity and food prices and labor and energy costs, and our ability to mitigate potential increases in such costs; (v) anticipated continued investments in our partnership with Donatos® and other restaurant improvements, including the timing thereof; (vi) our expectations about anticipated uses of, and risks associated with, future cash flows, liquidity, capital expenditures, other capital deployment opportunities and taxes; (vii) the seasonality of our business; (viii) our ability to successfully implement, and our expectations regarding, our North Star five-point plan to enhance the Company's competitive positioning; (ix) litigation contingencies and the adequacy of our reserves for legal matters; (x) our expectations regarding, and our ability to mitigate changes in, interest rates, commodity prices, and other factors; (xi) our strategies to enhance our liquidity position; and (xii) transactions including sale-leaseback transactions and acquisitions of certain restaurants from a franchisee.
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 effectiveness of the Company's strategic initiatives, including our "North Star" plan, labor and service models, and operational improvement initiatives and our ability to execute on such strategic initiatives; the global and domestic economic and geopolitical environment; our ability to effectively compete in the industry and attract and retain Guests; the adequacy of cash flows and the cost and availability of capital or credit facility borrowings; a privacy or security breach or a failure of our information technology systems; the effectiveness and timing of the Company's marketing and branding strategies, including the loyalty program and social media platforms; changes in consumer preferences; leasing space including the location of such leases in areas of declining traffic; changes in cost and availability of commodities; interruptions in the delivery of food and other products from third parties; pricing increases and labor costs; changes in consumer behavior or preference; expanding our restaurant base; maintaining and improving our existing restaurants; the transition and retention of our key personnel; our ability to recruit, staff, train, and retain our workforce; operating conditions, including adverse weather conditions, natural disasters, pandemics and other events affecting the regions where our restaurants are operated; actions taken by our franchisees that could harm our business or reputation; negative publicity regarding food safety or health concerns; protection of our intellectual property rights; changes in federal, state, or local laws and regulations affecting the operation of our restaurants; an increase in litigation or legal claims by Team Members, franchisees, customers, vendors, stockholders and others; and the other Risk Factors described from time to time in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in the interest rate risk or commodity price risk since the filing of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
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. As of July 14, 2024, we had $167.9 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 pre-tax interest expense fluctuation of $1.7 million on an annualized basis.
We purchase food, supplies and other commodities for use in our operations based on prices established with our suppliers. 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 $3.0 million on an annualized basis.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC'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.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Evaluating contingencies related to litigation is a complex process involving subjective judgment on the potential outcome of future events and the ultimate resolution of litigated claims may differ from our current analysis. Accordingly, we review the adequacy of accruals and disclosures each quarter in consultation with legal counsel and we assess the probability and range of possible losses associated with contingencies for potential accrual in the Condensed Consolidated Financial Statements.
For further information related to our litigation contingencies, see Note 8. Commitments and Contingencies, in the Notes to the Condensed Consolidated Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 1A. Risk Factors
Risk factors associated with our business are contained in Item 1, "Risk Factors," of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC on February 28, 2024. There have been no material changes from the risk factors disclosed in the fiscal year 2023 Annual Report on Form 10-K.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the second quarter of fiscal 2024, the Company did not have any sales of securities in transactions that were not registered under the Securities Act of 1933, as amended, that have not been reported in a Current Report on Form 8-K, nor were any share repurchases made by the Company.
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ITEM 5. Other Information
Securities Trading Plans of Directors and Executive Officers
During the second quarter ended July 14, 2024, none of our directors or officers adopted, modified or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement" as such terms are defined under Item 408 of Regulation S-K.
Second Amendment to Credit Agreement
On August 21, 2024, the Company entered into an incremental amendment to its Credit Agreement (the "Second Amendment"), by and among the Company, Red Robin International, Inc., as the borrower (the "Borrower"), certain subsidiary guarantors party thereto, certain incremental revolving lenders party thereto (the "Revolving Incremental Lenders"), the other lenders party thereto and Fortress Credit Corp., as administrative agent and as collateral agent (the "Agent"), which amends the Credit Agreement, dated as of March 4, 2022 (as amended by that certain Amendment No. 1, dated as of July 17, 2023, the "Credit Agreement", and by the Second Amendment, the "Amended Credit Agreement"), by and among the Company, the Borrower, the lenders and issuing banks from time to time party thereto, the Agent and the other parties from time to time party thereto. All capitalized terms not defined herein have the meanings given to them in the Amended Credit Agreement.
The Second Amendment provides additional flexibility to continue to implement our business strategy, making the following changes, among others, to the Credit Agreement:
•The Revolving Incremental Lenders will extend incremental revolving facility commitments to increase the size of the existing $25 million revolving line of credit by $15 million to $40 million. The $15 million increased commitments will terminate at end of the third quarter of 2025 at which time the revolving line of credit will be reduced back to $25 million.
•Removes the variable Pricing Grid and increases the Applicable Margin on all Term Loans and Revolving Facility Loans that are SOFR Loans to 7.50% per annum and that are ABR Loans to 6.50% per annum.
•Provides certain relief from the financial covenant by increasing the required Maximum Net Total Leverage Ratio beginning in the third quarter of 2024 through the third quarter of 2025.
•Adds certain additional reporting requirements.
The summary descriptions of the Second Amendment do not purport to be complete and are qualified in their entirety by reference to the full text of the Second Amendment, a copy of which is attached hereto as Exhibit 10.6 and is incorporated herein by reference.
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ITEM 6. Exhibits
Exhibit
Number 		Description
10.2*
Form of Red Robin Gourmet Burgers, Inc. 2024 Performance Incentive Plan Performance Stock Unit Award Agreement
10.3*
Form of Red Robin Gourmet Burgers, Inc. 2024 Performance Incentive Plan Restricted Stock Unit Award Agreement
10.4*
Form of Red Robin Gourmet Burgers, Inc. 2024 Performance Incentive Plan Cash Performance Award Agreement
10.5*
Form of Red Robin Gourmet Burgers, Inc. 2024 Performance Incentive Plan Nonemployee Director Restricted Stock Unit Award Agreement
10.6
Amendment No. 2, dated August 21, 2024, by and among Red Robin Gourmet Burgers, Inc., Red RobinInternational, Inc., Fortress Credit Corp., and the lenders party thereto, to Credit Agreement dated March 4, 2022.
31.1
Rule 13a-14(a) Certification of Chief Executive Officer
31.2
Rule 13a-14(a) Certification of Chief Financial Officer
32.1
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer
101
The following financial information from the Quarterly Report on Form 10-Q of Red Robin Gourmet Burgers, Inc. for the quarter ended July 14, 2024 formatted in XBRL (extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at July 14, 2024 and December 31, 2023; (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the twenty-eight weeks ended July 14, 2024 and July 9, 2023; (iii) Condensed Consolidated Statements of Stockholders' Equity at July 14, 2024 and July 9, 2023; (iv) Condensed Consolidated Statements of Cash Flows for the twenty-eight weeks ended July 14, 2024 and July 9, 2023; and (v) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
( ) Exhibits previously filed in the Company's periodic filings as specifically noted.
* Executive compensation plans and arrangements.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RED ROBIN GOURMET BURGERS, INC.
(Registrant)
August 22, 2024
By:
/s/ Todd Wilson
(Date)
Todd Wilson
(Chief Financial Officer)
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