10-K 1 rrgb-20161225x10k.htm 10-K Document
QuickLinks -- Click here to rapidly navigate through this document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________
FORM 10-K
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 25, 2016
o
 
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
(State or other jurisdiction of
incorporation or organization)
 
84-1573084
(I.R.S. Employer
Identification No.)
6312 S Fiddler’s Green Circle, Suite 200N
 
 
Greenwood Village, CO
 
80111
(Address of principal executive offices)
 
(Zip Code)
(303) 846-6000
(Registrant's telephone number, including area code)
______________________________________________________________
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value
Name of each exchange on which registered: NASDAQ (Global Select Market)
Securities Registered Pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o    No ý
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 ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer ý
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý
The aggregate market value of the voting and non-voting common stock held by non-affiliates (based on the closing price on the last business day of the registrant's most recently completed second fiscal quarter on The NASDAQ Global Select Market) was $641.6 million. All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be "affiliates" of the registrant.
There were 12,857,564 shares of common stock outstanding as of February 20, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K is incorporated by reference to the registrant's definitive proxy statement for the 2016 annual meeting of stockholders.
 
 
 
 
 




RED ROBIN GOURMET BURGERS, INC.
TABLE OF CONTENTS

 
 
Page
PART I
PART II
PART III
 
PART IV

1


PART I
ITEM 1.    Business
Overview
Red Robin Gourmet Burgers, Inc., together with its subsidiaries, primarily develops, operates, and franchises full-service restaurants in North America and focuses on serving an imaginative selection of high quality gourmet burgers in a fun environment welcoming to guests of all ages. We opened the first Red Robin® restaurant in Seattle, Washington in September 1969. In 1979, the first franchised Red Robin restaurant was opened in Yakima, Washington. In 2001, we formed Red Robin Gourmet Burgers, Inc., a Delaware corporation, and consummated a reorganization of the company. Since that time, Red Robin Gourmet Burgers, Inc. has owned, either directly or indirectly, all of the outstanding capital stock or membership interests, respectively, of Red Robin International, Inc. and our other operating subsidiaries through which we operate our Company-owned restaurants. Unless otherwise provided in this Annual Report on Form 10-K, references to “Red Robin,” “we,” “us,” “our” or the “Company” refer to Red Robin Gourmet Burgers, Inc. and our consolidated subsidiaries. For the 52-week fiscal year 2016, we generated total revenues of $1.3 billion. As of the end of our fiscal year on December 25, 2016, there were 551 Red Robin restaurants, of which 465 were Company-owned and 86 were operated by franchisees. Our franchisees are independent organizations to whom we provide certain support. See “Restaurant Franchise and Licensing Arrangements” for additional information about our franchise program. As of December 25, 2016, there were Red Robin restaurants in 44 states and two Canadian provinces.
Financial information for our single operating segment is included in Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
The Company’s fiscal year is 52 or 53 weeks ending the last Sunday of the calendar year. Fiscal years 2016, 2015, 2014, and 2013 each included 52 weeks, ending on December 25, 2016, December 27, 2015, December 28, 2014, and December 29, 2013. Fiscal years 2017 and 2012 include 53 weeks, ending on December 31, 2017 and December 30, 2012. We refer to our fiscal years as 2017, 2016, 2015, 2014, 2013, and 2012 throughout this Annual Report on Form 10-K.
Business Strategy
Red Robin’s goal is to differentiate itself from typical casual dining establishments based on quality, service, and value. To differentiate on quality, we offer a large and varied selection of highly craveable and customizable burgers. To differentiate on service, our goal is to be highly attentive to guests of all ages, serving food and beverages quickly so they can spend more time enjoying their food and less time waiting. We also strive to deliver tremendous value by providing delicious food at a range of price points, accompanied with our bottomless steak fries and other sides with every meal. Red Robin guests give us credit for these key points of differentiation and we seek to build on them every day by living our B.U.R.G.E.R. values: Bottomless Fun, Unwavering Integrity, Relentless Focus on Improvement, Genuine Spirit of Service, Extraordinary People, and Recognized Burger Authority.
To ensure the continued success of Red Robin in a rapidly evolving marketplace, we focus on four strategic areas:
Building team member engagement. We emphasize and support team member engagement, retention, and culture that will foster the development of great leaders. Our goal is to enhance clarity with our team members by consistently communicating our strategy and ensuring we remain narrowly focused on our strategic initiatives. We continually strive to develop extraordinary people and encourage team member performance through appreciation, recognition, and respect. In an effort to continue to develop leadership strength, we are focused on expanding our school of leadership, executing dynamic succession planning, and innovative recruiting and talent development. See “Learning and Development” below for additional information about our team member development initiatives.
Regaining operational edge. Our strategy in regaining operational edge includes delivering consistently great burgers, accurately customized, and served quickly by our caring team members. Our goal is to deliver exceptional service to our guests through promoting a “Better for Being Here” environment and continually strive to enhance our guest’s dining experience with a focus on guests of all ages and their occasions. We respect our guests’ need for the “gift of time” and remain committed to improving both speed of service and order accuracy.
Becoming our guests’ go-to for great burgers.  We continue to focus on being our guests’ go-to for great burgers by offering craveable burgers and “bottomless” side options at attractive prices wherever and however our guests want. We plan to enhance value through a balance of quality, quantity, price, and experience. This includes providing high quality core menu items, delivering value through new products and abundance, and enhancing loyalty offerings to

2


drive guest traffic. Additionally, we are focused on driving guest preference by offering our products through alternate platforms. As part of this strategy, we are currently testing and deploying online ordering, to-go, and catering services and developing partnerships with and deploying third-party delivery services.
Delivering great shareholder value. We are committed to delivering shareholder value by improving profitability and investing capital wisely. Our goal is to optimize our capital structure, pace development activities, and improve our EBITDA margin through revenue growth and targeted cost savings.
Restaurant Concept
The Red Robin brand has many desirable attributes, including a range of high-quality menu items, a strong guest-focused culture, and a value proposition designed to help our guests customize their experiences.
We pride ourselves on being THE Burger Authority. Our menu features our signature product, a line of Gourmet Burgers which we make from premium quality, fresh ground beef as well as our everyday-value line of Red’s Tavern Double® burgers, and our Red Robin’s Finest line of half-pound Angus beef burgers and all-natural, 7-ounce, fire-grilled chicken breasts with premium toppings. We also offer burgers made from chicken breasts, fish fillets, and turkey patties, as well as vegetarian and vegan options. We offer a wide selection of buns, including ciabatta, gluten free, sesame, onion, whole grain, jalapeno, and lettuce wraps, with a variety of toppings, including fresh guacamole, housemade barbeque sauces, aiolis, grilled pineapple, crispy onion straws, sautéed mushrooms, fried jalapenos, bruschetta salsa, coleslaw, eight different cheese choices, and a fried egg. All of our burgers are served with our all-you-can-eat Bottomless Steak Fries® or a guest may choose from five bottomless sides. We specialize in customizing our menu items to meet our guests’ dietary needs and preferences. In addition to burgers, which accounted for approximately 50.0% of our total food and beverage sales in 2016, Red Robin serves an array of other items that appeal to a broad range of guests. These items include a variety of appetizers (priced at $3, $5, $7, and $9); salads, soups, seafood, and other entrees; desserts; the Company’s signature alcoholic and non-alcoholic specialty beverages; and a broadened variety of national and craft beers.
We strive to meet the needs of our guests by offering a choice of experiences and occasions from time-pressured meals to a place to relax and unwind with friends. Red Robin also has an unparalleled and extraordinary approach to guest service and we have cataloged thousands of stories of Red Robin team members who live our values. Many examples can be found on our website, www.redrobin.com. We encourage our team members to execute on the aspects of service that we have identified to be the biggest drivers of our guest loyalty. Note that our website and the information contained on or connected to our website are not incorporated by reference herein, and our web address is included as an inactive textual reference only.
We also strive to provide our guests with exceptional dining value and the ability to customize their experience. In 2016, we had an average check per guest of $13.05 including beverages. We believe this price-to-value relationship, our innovative array of burgers ranging in price from $6.99 to $14.69, differentiates us from our casual dining competitors and allows us to appeal to a broad base of consumers with a wide range of income levels.
Operations
Restaurant Management
Our typical restaurant management team consists of a general manager, an assistant general manager, and two or three assistant managers depending on restaurant sales volumes. The management team of each restaurant is responsible for the day-to-day operation of that restaurant, including hiring, training, and coaching of team members, as well as operating results. Our typical restaurant employs approximately 58 hourly team members, most of whom work part-time.
For our new restaurants, we try to identify seasoned leadership teams 6 to 12 months in advance of opening, with the expectation that seasoned leadership will provide a better team member and guest experience while enabling a new restaurant to quickly reach normalized operations.
Learning and Development
We strive to maintain quality and consistency in each of our restaurants through the training and supervision of team members and the establishment of, and adherence to, high standards relating to team member performance, food and beverage preparation, and the maintenance of our restaurants. Each restaurant maintains a group of certified learning coaches who are tasked with preparing new team members for success by providing on-the-job training leading up to a final skills certification for their position. Team members seeking advancement have the opportunity to join our management development program as a Shift Supervisor.

3


Shift Supervisors complete an in-depth training curriculum that develops their ability to supervise all aspects of shift execution, including, but not limited to: food safety, food production, coaching, and financial aspects of the business. The Shift Supervisor program is an important stepping stone for hourly team members who desire a career in restaurant management.
New restaurant managers participate in our eight-week Management Foundations training program. This program hones each manager’s skills, specifically in two areas: flawless shift execution and effective coaching of team members.
Providing our restaurant teams the support and resources they need to be successful requires dedication, an of-service attitude, and the utmost professionalism on the part of our home office team. We ensure the home office team members have what they need to meet these demands by offering several avenues to enhance their professional development, including but not limited to an in-house leadership library of over 400 titles, more than 40 on-site and 12 off-site development workshop opportunities, as well as one-to-one coaching.
The success of each restaurant, region, and department within the organization relies heavily on the leadership at each of those levels. Leaders across the organization regularly receive a powerful assessment tool that provides them in-depth insight into the effectiveness of their leadership and the impact it is having on their teams. Additionally, leaders have the opportunity to be selected for our School of Leadership program which guides a cohort of 16 leaders through three retreats over the course of four months. This powerful program enables leaders to identify their purpose, their teams’ purpose, and the purpose they serve within the organization.
Food Safety and Purchasing
Our food safety and quality assurance programs help manage our commitment to quality ingredients and food preparation. Our systems are designed to protect our food supply from product receipt through preparation and service. We provide detailed specifications for our food ingredients, products, and supplies to our suppliers. We qualify and audit our key manufacturers and growers and require their certification under the Global Food Safety Initiative. Our restaurant managers are certified in a comprehensive safety and sanitation course by the National Restaurant Association’s ServSafe program. Minimum cooking requirements, specifically safe handling, cooling procedures, and frequent temperature and quality checks, exist for the safety and quality of all food we serve in our restaurants. In order to provide the freshest ingredients and products and to maximize operating efficiencies between purchase and usage, each restaurant’s management team determines the restaurant’s daily usage requirements for food ingredients, products, and supplies, and accordingly, orders from approved suppliers, and distributors. The restaurant management team inspects deliveries to ensure the products received meet our safety and quality specifications. Additionally, we utilize the services of an independent auditing company to perform unannounced comprehensive food safety and sanitation inspections four times a year in all Company-owned and franchised restaurants.
To maximize our purchasing efficiencies and obtain the best possible prices for our high-quality ingredients, products, and supplies, our centralized purchasing team negotiates supply agreements which may include fixed price contracts that vary in term lengths or formula based pricing agreements which can fluctuate on changes in raw material commodity pricing. Ground beef represented approximately 12% of our total cost of goods in 2016 and chicken represented approximately 10% of our total cost of goods. We monitor the primary commodities we purchase and extend contract positions when applicable in order to minimize the impact of fluctuations in price and availability. However, certain commodities, primarily ground beef, remain subject to market price fluctuations. We continue to identify competitively priced, high quality alternative manufacturers, suppliers, growers, and distributors that are available should the need arise; however, we have not experienced significant disruptions in our supply chain. As of December 25, 2016, approximately 60% of our estimated annual food and beverage purchases were covered by fixed price contracts, most of which are scheduled to expire at various times through the end of 2017.
Restaurant Development
Red Robin seeks to grow its restaurant base prudently considering a number of factors including general economic conditions, expected financial performance, availability of appropriate locations, competition in local markets, and the availability of teams to manage new locations. Our site selection criteria focuses on identifying markets, trade areas, and specific sites that are likely to yield the greatest density of desirable demographic characteristics, retail traffic, and visibility. During 2016, we opened 26 Company-owned restaurants, acquired 13 Red Robin franchised restaurants, and relocated two Red Robin restaurants. Over the past three years, we have opened a total of 72 new restaurants, acquired 50 franchised restaurants, and relocated six units.
During 2017, we expect to open approximately 17 new Company-owned Red Robin restaurants, which together with our 2016 new restaurant openings and a 53rd week will increase the Company’s total operating weeks by approximately 5%. The

4


costs of a 4,500 to 5,800 square foot Red Robin restaurant range from $2.0 million to $2.4 million, depending on location (stand alone, mall, or in-line retail) and geographic area, excluding land.
Restaurant Franchise and Licensing Arrangements
As of December 25, 2016, our franchisees operated 86 restaurants in 15 states. In 2016, our franchisees sold 13 restaurants to us. Our two largest franchisees own 43 restaurants located in Michigan, Ohio, and eastern and central Pennsylvania. We have not actively sought new franchisees in recent years. We expect franchise unit growth to resume after our franchisees complete required investments to bring existing restaurants to our current brand and design standards. We anticipate these franchisee remodels will be completed through 2018.
Franchise Compliance Assurance
We actively work with and monitor our franchisees’ performance to help them develop and operate their restaurants in compliance with Red Robin’s standards, systems, and procedures. During the restaurant development phase, we review the franchisee’s site selection and provide the franchisee with our prototype building plans. We provide trainers to assist the franchisee in opening the restaurant for business. We advise the franchisee on all menu items, management training, and equipment and food purchases.
To continuously improve our marketing programs and operating systems, we maintain a franchise advisory board consisting of franchisee members that meet with the corporate executive team. Through this council, we solicit the input of our franchisees on marketing programs, including their suggestions as to which new menu items we should test and feature in future promotions. We also exchange best operating practices with our franchisees as we strive to improve our operating systems while attaining a high level of franchisee participation.
Information Technology
We rely on information systems in all aspects of our operations, including (but not limited to) point-of-sale transaction processing in our restaurants; operation of our restaurants; management of our inventories; collection of cash; payment of payroll and other obligations; and various other processes and procedures.
Our corporate offices and Company-owned restaurants are enabled with information technology and decision support systems. In our restaurants, these systems are designed to provide operational tools for sales, inventory, and labor management. This technology includes industry-specific, off-the-shelf systems, as well as proprietary software such as tools designed to optimize food and beverage costs and labor costs. These systems are integrated with our point-of-sale systems to provide daily, weekly, and period-to-date information that is important for managers to run an efficient and effective restaurant. We also use other systems to interact with our guests. These include online and in-restaurant guest feedback systems, which provide real-time results on guest service, food quality, and atmosphere to each of our restaurants.
We utilize centralized financial, accounting, and human resources/personnel systems for Company-owned restaurants. In addition, we use an operations scorecard which integrates data from our centralized systems with the distributed information managed in our restaurants. We believe these combined tools are important in analyzing and improving our operations, profit margins, and other results.
In order to increase efficiency, operational capabilities, and to support growth, we have committed to a significant capital investment to upgrade and expand some of these systems. In 2016, we continued to invest in technologies and data infrastructure that support operational excellence, guest engagement, and team member talent management as well as improving other systems and processes. During the third quarter 2016, we completed the rollout of kitchen and seating management systems to all Company-owned restaurants giving our restaurant teams better tools to support high quality guest experiences. In the fourth quarter 2016, we completed the migration of our Oracle Fusion financial platform to Oracle’s public cloud environment, standardizing and simplifying our financial systems infrastructure while leveraging a sustainable strategy for upgrades. In 2017, we plan to invest in technologies and data infrastructure which enable simplification and standardization for our restaurant teams; provide our guests with digital experiences that support in-restaurant or off-premise dining; and create efficiencies of business operation.
We accept electronic payment cards from our guests for payment in our restaurants. We also receive and maintain certain personal information about our guests and team members. We have systems and processes in place that focus on the protection of our guests’ credit card information and other private information that we are required to protect, such as our team members’ personal information. We have taken a number of steps to prevent the occurrence of security breaches in this respect. Our systems have been carefully designed and configured to protect against data loss or compromise. For example, because of the

5


number of credit card transactions processed in our Company-owned stores, we are required to maintain the highest level of Payment Card Industry (“PCI”) Data Security Standard compliance at our corporate offices and Company-owned restaurants. These standards, set by a consortium of the major credit card companies, require certain levels of system security and procedures to protect our customers’ credit card and other personal information. Our credit card security practices and systems are certified as compliant with the PCI Data Security Standard annually by an independent, qualified security assessor.
We also engage other security assessors and consultants to review and advise us on our other data security practices with respect to protection of other sensitive personal information that we obtain from guests and team members.
Marketing and Advertising
We build brand equity and awareness primarily through national marketing, including national television, digital media, social media programs, email, loyalty, and public relations initiatives. These programs are funded primarily through cooperative creative development and national media advertising funds.
In recent years, we have undertaken significant market research initiatives to gain feedback and perceptions in order to inform our business decisions. Among other things, we use a guest satisfaction tool in all restaurants that provides feedback from guests on their experiences. Restaurant managers use this information to help identify areas of focus to strengthen restaurant performance and track progress. We also continually monitor our performance relative to peers and test potential business drivers among both current and potential guests. We closely track the frequency and purchase behavior of guests who are members of our Red Robin RoyaltyTM loyalty program.
In 2016, our marketing strategy began to shift toward a concentrated, rather than continuous, media buying approach with a focus on generating significant reach and frequency during on-air advertising periods. We plan to continue with this concentrated marketing approach in 2017, while communicating a clear message of value, innovation, and fun across a variety of advertising media. We will also deploy increased marketing support for our alternative platforms initiative, including generating guest awareness of our online ordering, to-go, and catering dining opportunities.
Team Members
As of December 25, 2016, we had 29,293 employees, whom we refer to as team members, consisting of 28,931 team members at Company-owned restaurants and 362 team members at our corporate headquarters and field offices. None of our team members are covered by a collective bargaining agreement. We consider our team member relations to be good.
We support our team members by offering competitive wages and benefits for eligible team members, including medical and other insurance, an employee stock purchase plan, and equity-based awards for eligible corporate and operations employees at the director level and above. We motivate and prepare our team members by providing them with opportunities for increased responsibilities and advancement. At certain levels, we also offer performance-based incentives tied to sales, profitability, and/or certain qualitative measures.
Executive Officers
The following table sets forth information about our executive officers and other key employees:
Name
 
Age
 
Position
Denny Marie Post
 
59

 
Chief Executive Officer(1)
Guy J. Constant
 
52

 
Executive Vice President and Chief Financial Officer
Carin L. Stutz
 
60

 
Executive Vice President and Chief Operating Officer
Cathy Cooney
 
65

 
Senior Vice President and Chief People Officer
Michael Furlow
 
59

 
Senior Vice President and Chief Information Officer
Les L. Lehner
 
45

 
Senior Vice President of Real Estate and Development
Michael L. Kaplan
 
48

 
Senior Vice President, Secretary and Chief Legal Officer
Jonathan Muhtar
 
45

 
Senior Vice President and Chief Marketing Officer
(1) Also a member of the Company’s board of directors.
Denny Marie Post.    Ms. Post was appointed Chief Executive Officer in August 2016. Ms. Post previously served the Company in various roles as its President, Executive Vice President and Chief Concept Officer, and Senior Vice President and Chief Marketing Officer. Before joining Red Robin, she was the Managing Member of mm&i Consulting LLC, a marketing consulting firm, from June 2010 to July 2011. Ms. Post served as Senior Vice President, Chief Marketing Officer of T-Mobile

6


USA from July 2008 to May 2010, as Senior Vice President, Global Beverage, Food, and Quality at Starbucks Corporation from February 2007 to June 2008, as Senior Vice President, Chief Concept Officer of Burger King Corp. from April 2004 to January 2007, and prior to that, in various marketing executive roles at YUM! Brands, Inc.
Guy J. Constant. Mr. Constant joined Red Robin as Executive Vice President and Chief Financial Officer in December 2016. Mr. Constant previously served as Chief Financial Officer, Executive Vice President of Finance and Treasurer of Rent-A-Center, Inc. from June 2014 to December 2016. Prior to that, Mr. Constant was the Chief Financial Officer and Executive Vice President of Brinker International Inc. from September 2010 to March 2014. At Brinker, he also served as Senior Vice President of Finance from May 2008 to September 2010, Vice President of Strategic Planning and Analysis and Investor Relations from September 2005 to May 2008, and Senior Director of Compensation from November 2004 to September 2005. Prior to Brinker, he spent nine years at AMR Corporation, the parent company of American Airlines, in various finance positions of increasing scope and responsibility.
Carin L. Stutz. Ms. Stutz joined the Company as Executive Vice President and Chief Operating Officer in April 2016. Prior to joining the Company, Ms. Stutz served as President of McAlister’s Corporation of Focus Brands Inc. from November 2014 to April 2016. Ms. Stutz was the Chief Executive Officer and President of Cosi Inc. from January 2012 to June 2013. She was President of Global Business Development of Brinker International Inc. from December 2010 to December 2011. She also served as Senior Vice President of Strategic Operations and Senior Vice President and Chief Operating Officer of Global Business Development at Brinker beginning in January 2009. Prior to joining Brinker, she served as Senior Vice President of Company Operations of Applebee’s International Inc. from 1999 to 2005 and as Executive Vice President of Operations of Applebee’s from 2005 to 2007.
Cathy Cooney.    Ms. Cooney joined the Company as Senior Vice President and Chief People Officer in July 2013. Ms. Cooney previously served as Executive Vice President, Human Resources of CareFusion Corporation from September 2009 to June 2011 and prior its spinoff she served as Senior Vice President, Human Resources-Clinical and Medical Products of Cardinal Health from July 2008 to September 2009. She was Senior Vice President, Human Resources-Clinical Technologies, and Services from September 2004 to July 2008 and Senior Vice President, Human Resources-Leadership Development of Cardinal Health from January 2003 to September 2004.
Michael Furlow. Mr. Furlow joined Red Robin as Senior Vice President and Chief Information Officer in October 2015. Prior to joining the Company, Mr. Furlow served as Senior Vice President of Information Technology and Chief Information Officer of CEC Entertainment, Inc. from May 2011 to January 2015, as Senior Vice President of Information System of Brinker International, Inc. from September 2005 to January 2011, as Chief Information Officer of Dunkin’s Brand Group, Inc. from April 2002 to August 2005, and as Chief Information Officer of Einstein Noah Restaurant Group, Inc. from 1998 to 2002.
Les L. Lehner. Mr. Lehner joined Red Robin as Senior Vice President of Real Estate and Development in May 2015. Prior to joining the Company, Mr. Lehner served as Senior Vice President of Real Estate/Development at CEC Entertainment. Mr. Lehner was at CEC Entertainment from 2001 to 2015. During his tenure he also served as Vice President of Real Estate, Sr. Director of Real Estate and Purchasing, and Director of Finance.
Michael L. Kaplan.    Mr. Kaplan joined Red Robin as Senior Vice President, Chief Legal Officer and Secretary in October 2013. Prior to joining the Company, he served as Senior Vice President, General Counsel, Chief Security Officer and Corporate Secretary of DAE Aviation Holdings, Inc. (d/b/a Standard Aero), a privately held global aviation maintenance company, from January 2010 to September 2013, and as a Shareholder at Greenberg Traurig, LLP, an international law firm, from January 2002 to January 2010.
Jonathan Muhtar. Mr. Muhtar joined Red Robin as Senior Vice President and Chief Marketing Officer in December 2015. Prior to joining the Company, Mr. Muhtar served as Executive Vice President and Chief Marketing Officer of Captain D’s Seafood Restaurant from November 2011 to December 2015, and as Vice President of Global Marketing and Innovation and in other corporate and marketing positions at Burger King Corporation from July 2004 to June 2011.
Competition
The restaurant industry is highly competitive and our guests may choose to purchase food at supermarkets or other food retailers. For some occasions, we compete against other segments of the restaurant industry, including quick-service and fast-casual restaurants, but our primary competition is with other sit-down, casual dining restaurants. In addition, we compete to attract guests for off-premise dining occasions, including online ordering, delivery, to-go, and catering. The number, size, and strength of competitors vary by region, concept, market, and even restaurant. We compete on the basis of taste, quality, price of food offered, guest service, ambiance, location, and overall dining experience. In particular, we face competition from concepts focused on the sale of hamburgers, including quick service, and fast casual concepts. Many of these concepts are expanding faster than we are and are penetrating both geographic and demographic markets that we target as well. Moreover, many of

7


these concepts compete with smaller-sized building units, which allow them greater flexibility in site selection and market penetration.
We believe that our guest demographics, strong brand recognition, gourmet burger concept, attractive price-value relationship, and the quality of our food and service enable us to differentiate ourselves from our competitors. We believe we compete favorably with respect to each of these factors. Our competitors include well-established national chains which have more substantial marketing resources. We also compete with many other restaurant and retail establishments for site locations and team members.
Seasonality
Our business is subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the summer months and winter holiday season due to factors including our retail-oriented locations and family appeal. As a result, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly as a result of seasonality. 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, and comparable restaurant sales for any particular future period may decrease.
Trademarks
We have a number of registered trademarks and service marks, including the Red Robin, Red Robin Gourmet Burgers®, Red Robin America’s Gourmet Burgers & Spirits®, Red Robin Burger Works®, “YUMMM®”, Red Robin Gourmet Burgers and BrewsTM, and Red Robin RoyaltyTM names and logos. We have registered or filed applications for trademarks for these marks, among others, with the United States Patent and Trademark Office, and we have applied to register various trademarks in certain other international jurisdictions.
In order to better protect our brand, we have also registered the Internet domain name www.redrobin.com. We believe that our trademarks, service marks, and other intellectual property rights have significant value and are important to our brand building efforts and the marketing of our restaurant concept.
Government Regulation
Our restaurants are subject to licensing and regulation by state, province, and local health, safety, fire, and other authorities, including licensing requirements, and regulations for the sale of alcoholic beverages and food. To date, we have been able to obtain and maintain all necessary licenses, permits, and approvals. The development and construction of new restaurants is subject also to compliance with applicable zoning, land use, and environmental regulations. We are also subject to federal regulation and state laws that regulate the offer and sale of franchises and substantive aspects of the franchisor-franchisee relationship. Various federal and state labor laws govern our relationship with our team members and affect operating costs. These laws govern minimum wage requirements, overtime pay, meal and rest breaks, unemployment tax rates, health care and benefits, workers’ compensation rates, citizenship or residency requirements, child labor regulations, and discriminatory conduct. Federal, state and local government agencies have established or are in the process of establishing regulations requiring that we disclose to our guests nutritional information regarding the items we serve.
Available Information
We maintain a link to investor relations information on our website, www.redrobin.com, where we make available, free of charge, our Securities and Exchange Commission (“SEC”) filings, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. All SEC filings are also available at the SEC’s website at www.sec.gov. Our website and the information contained on or connected to our website are not incorporated by reference herein, and our web address is included as an inactive textual reference only.
Forward-Looking Statements
Certain information and statements contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) codified at Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act. This statement is included for purposes of complying with the safe harbor provisions of the PSLRA. Forward-looking statements include statements regarding our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. These statements may be identified, without limitation, by the use of forward-looking terminology such as “anticipate,” “assume,” “believe,” “could,” “estimate,” “expect,” “future,” “intend,”

8


“may,” “plan,” “project,” “will,” “would,” and similar expressions. Certain forward-looking statements are included in this Annual Report on Form 10-K, principally in the sections captioned “Business,” “Legal Proceedings,” “Consolidated Financial Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements relate to, among other things:
our business objectives and strategic plans, including growth in guest traffic and revenue; improvements in operational efficiencies and expense management; enhancing our restaurant environments and guest engagement; expanding our restaurant base; and designing, testing, and implementing restaurant development activities;
the continuation of our share repurchase program, and other capital deployment opportunities;
our ability to grow our average check and increase sales of incremental items;
our focus on attracting new guests while retaining loyal guests and our initiatives targeted at adult guests as our restaurant concept evolves;
our ability to grow sales through menu and service enhancement;
any future price increases and their effect on our revenue and profit;
the timing and cost of our investment and implementation of a major overhaul of our information technology systems and data infrastructure to support guest engagement, team member talent management, and anticipated related benefits;
anticipated Company-owned restaurant openings, including the anticipated number and type of new restaurants, and the timing of such openings;
anticipated restaurant operating costs, including commodity and food prices; labor and energy costs; and selling, general, and administrative expenses, the effect of inflation on such costs, and our ability to reduce overhead costs and improve efficiencies;
anticipated legislation and other regulation of our business, including minimum wage standards;
our brand transformation initiatives, including the anticipated number and timing of restaurant remodels, and expected financial performance of remodeled restaurants;
developing, testing, and implementing new initiatives, such as online ordering services, third-party delivery services, utilizing an offsite call center to handle to-go orders, developing new to-go packaging, and catering services, and addressing operating issues associated with these initiatives;
the amount of capital expenditures in 2017;
our expectation that we will have adequate cash from operations and credit facility borrowings to meet all future debt service, capital expenditures, and working capital requirements in 2017 and beyond;
anticipated retention of future cash flows to fund our operations and expansion of our business, to fund growth opportunities, to pay down debt, or to repurchase stock;
the sufficiency of the supply of our food, supplies, and labor pool to carry on our business;
the ability to fulfill planned expansions, including both new and existing markets;
our franchise program, franchisee new restaurant openings and remodels, and potential expansion and other changes to our franchise program;
anticipated interest and tax expense;
expectations regarding our operations in Canada and the resulting currency fluctuation risk related thereto;
expectations about any future interest rate swap;
the effect of the adoption of new accounting standards on our financial and accounting systems and analysis programs;
expectations regarding competition and our competitive advantages against our casual dining peers; and
expectations regarding consumer preferences and consumer discretionary spending.
Although we believe that 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 Critical Accounting Policies and Estimates and Risk Factors, as well as other possible factors not listed, could cause actual results to differ materially from those expressed in forward-looking statements, including, without limitation, the following: the effectiveness of our business strategy and improvement initiatives; effectiveness of our marketing campaign; our ability to effectively use and monitor social media; uncertainty regarding general economic conditions; concentration of restaurants in certain markets, and lack of market awareness in new markets; changes in consumer disposable income; consumer spending trends and habits;

9


ineffectiveness of our information technology efforts; regional mall and lifestyle center traffic trends; increased competition and discounting in the casual dining restaurant market; costs and availability of food and beverage inventory; changes in commodity prices, particularly ground beef; changes in energy and labor costs, including due to changes in health care, and market wage levels; changes in government laws and regulations affecting the operation of our restaurants, including but not limited to, minimum wages, consumer health and safety, health insurance coverage, nutritional disclosures, and employment eligibility-related documentation requirements; limitations on the Company’s ability to execute stock repurchases due to lack of available shares or acceptable stock price levels or other market or Company-specific conditions; our ability to attract qualified managers, and team members; changes in the availability of capital or credit facility borrowings; costs and other effects of legal claims by team members, franchisees, customers, vendors, stockholders, and others, including settlement of those claims or negative publicity regarding food safety or cyber security; weather conditions, and related events in regions where our restaurants are operated; and changes in accounting standards policies, and practices or related interpretations by auditors or regulatory entities.
All forward-looking statements speak only as of the date made. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.
ITEM 1A.    Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully read and consider the risks described below before making an investment decision. The occurrence of any of the following risks could materially harm our business, financial condition, results of operations, or cash flows. The trading price or value of our common stock could decline, and you could lose all or part of your investment. When making an investment decision with respect to our common stock, you should also refer to the other information contained or incorporated by reference in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes.
Risks Related to Our Business
Our business improvement initiatives may not continue to be successful or achieve the desired results in a timely fashion.
We continue to evolve our business improvement initiatives that are designed to both improve the Company’s results in the short term and create sustainable growth in the long term. These initiatives continue to focus on enhancing our guest experience to increase revenue, improving operating efficiency and expense management, and growing our restaurant base through new Company-owned and franchised restaurants. They include our initiatives to elevate our guest experience through our brand transformation initiative and to upgrade our information technology and other systems, and the use of varying size restaurant prototypes to expand our ability to grow our restaurant base. While many of these initiatives have been implemented in various stages and are generating positive results, there is no assurance these initiatives and the projects undertaken to accomplish such initiatives will continue to be successful, or that the Company has, or will have sufficient resources to fully and successfully implement, sustain results from, or achieve additional expected benefits from them.
Our marketing and branding strategies to attract, engage, and retain our guests may not be successful, which could negatively affect our business.
We continue to evolve our marketing and branding strategies in order to appeal to customers and compete effectively to attract, engage, and retain customers. Our unique loyalty program, “Red Robin Royalty™” has experienced some success in driving sales and guest counts by providing loyal guests with various incentives and rewards. We intend to continue our focus on serving families while targeting adult occasions, and to grow beverage and food sales, including alcoholic beverages, appetizers and desserts, through menu, and service enhancements. We do not have any assurance our marketing strategies will be successful. If new advertising, modified branding, and other marketing programs and methods are not successful, we may not generate the level of restaurant sales or guest traffic we expect and the expense associated with these programs may negatively affect our financial results. Moreover, many of our competitors have larger marketing resources and more extensive national marketing strategies and media usage and we may not be able to successfully compete against those established programs.

10


Our inability to effectively use and monitor social media could harm our marketing efforts as well as our reputation, which could negatively impact our restaurant sales and financial performance.
As part of our marketing efforts, we rely on search engine marketing and social media platforms such as Facebook® and Twitter® to attract and retain guests. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal. Many of our competitors are expanding their use of social media and new social media platforms are rapidly being developed, potentially making more traditional social media platforms obsolete. Social media can be challenging because it reaches a broad audience with an ability to respond or react, in near real time, with comments that are often not filtered or checked for accuracy. In addition, social media can facilitate the improper disclosure of proprietary information, exposure of personally identifiable information, fraud, or out-of-date information. As a result, if we do not appropriately manage our social media strategies, our marketing efforts in this area may not be successful and any failure (or perceived failure) to effectively respond to negative or potentially damaging social media chatter, whether accurate or not, could damage our reputation, negatively impacting our restaurant sales and financial performance. The inappropriate use of social media vehicles by our guests or team members could increase our costs, lead to litigation, or result in negative publicity that could damage our reputation.
Our success depends on our ability to effectively compete in the restaurant industry to attract and retain guests.
Competition in the restaurant industry is intense and barriers to entry are low. Our competitors include a large and diverse group of restaurants in all segments ranging from quick serve and fast casual to “polished casual” and those verging on fine dining. These competitors range from independent local operators that have opened restaurants in various markets, high growth targeted “better” burger concepts in the quick serve and fast casual space, to the well-capitalized national restaurant companies. Many of these concepts have already captured segments of the market that we are targeting, such as adult-only occasions, and are expanding faster than we are, penetrating both desirable geographic and demographic markets. Many of our competitors are well established in the casual dining market segment and in certain geographic locations and some of our competitors have substantially greater financial, marketing, and other resources than we have available. Accordingly, they may be better equipped than us to increase marketing or to take other measures to maintain their competitive position, including the use of significant discount offers to attract guests. We also compete with other restaurants and retail establishments for real estate and attractive locations.
We may not be successful in developing and implementing important strategic initiatives, which may have an adverse impact on our business and consolidated financial results.
Our business depends upon our ability to continue to grow and evolve through various important strategic initiatives. There can be no assurance that we will be able to develop or implement these important strategic initiatives or that these strategic initiatives will deliver on their intended results, which could in turn adversely affect our business.
These strategic initiatives include currently testing and deploying online ordering services, developing an offsite call center to handle to-go orders, developing new to-go packaging, and catering services, and developing partnerships with and deploying third-party delivery services. These new programs may not increase our sales to the degree we expect, or at all. Catering, online ordering and other out-of-restaurant sales options also introduce new operating procedures to our restaurants, and we may not successfully execute these procedures, which could adversely impact the customer experience in our restaurants and thereby harm our sales and customer perception of our brand.
Changes in consumer preferences could negatively affect our results of operations.
The restaurant industry is characterized by the continual introduction of new concepts and is subject to rapidly changing consumer preferences, tastes, and eating and purchasing habits. Our restaurants compete on the basis of a varied menu and feature burgers, salads, soups, appetizers, other entrees, desserts, and our signature alcoholic and non-alcoholic beverages in a family-friendly atmosphere. Our continued success depends, in part, upon the continued popularity of these foods and this style of casual dining. Shifts in consumer preferences away from this cuisine or dining style could have a material adverse effect on our future profitability. In addition, competitors’ use of significant advertising and food discounting could influence our guests’ dining choices. One of our strategies is to provide a balance of both family-friendly and adult-focused guest experiences. There is no assurance that this balance will be successful or that it will not negatively affect our family guest experience.
Further, changing health or dietary preferences may cause consumers to avoid our products in favor of alternative foods. The food service industry as a whole rests on consumer preferences and demographic trends at the local, regional, national, and international levels, and the effect on consumer eating habits of new information regarding diet, nutrition, and health. New laws requiring additional nutritional information to be disclosed on our menus, changes in nutritional guidelines issued by the federal government agencies, issuance of similar guidelines or statistical information by other federal, state or local

11


municipalities, or academic studies, among other things, may affect consumer choice and cause consumers to significantly alter their dining choices in ways that adversely affect our sales and profitability.
Our inability to renew existing leases on favorable terms may adversely affect our results of operations.
As of December 25, 2016, 429 of our 465 Company-owned restaurants are located on leased premises. There can be no assurance we will be able to renew our expiring leases after the expiration of all remaining renewal options. As a result we may incur additional costs to operate our restaurants, including increased rent and other costs related to the negotiation of terms of occupancy of an existing leased premise. If we are unable to renew a lease or determine not to renew a lease, there may be costs related to the relocation and development of a replacement restaurant or, if we are unable to relocate, reduced revenue.
The global and domestic economic environment may negatively affect consumer spending and guest visits, which may negatively affect our revenues and our results of operations and may continue to do so in the future.
The global and domestic economic environment affects the restaurant industry, and may negatively affect the results of operations and financial condition of the Company and its customers, distributors, and suppliers. These conditions include unemployment, weakness and lack of consistent improvement in the housing markets; downtrend or delays in residential or commercial real estate development; volatility in financial markets; inflationary pressures; and reduced consumer confidence. As a result, our guests may be apprehensive about the economy and maintain or further reduce their level of discretionary spending. This could affect the frequency with which our guests choose to dine out or the amount they spend on meals, thereby decreasing our revenues and potentially negatively affecting our operating results. Also, our guests may choose to purchase food at supermarkets or other food retailers. We believe there is a risk that prolonged negative or uncertain economic conditions might cause consumers to make long-lasting changes to their discretionary spending behavior, including dining out less frequently on a more permanent basis, which would have a negative effect on our business. Moreover, our restaurants are primarily located near high density retail areas such as regional malls, lifestyle centers, big box shopping centers, and entertainment centers. We depend on a high volume of visitors at these centers to attract guests to our restaurants. A decline in development or closures of businesses in these settings or a decline in visitors to retail areas near our restaurants could negatively affect our restaurant sales.
Our operations are susceptible to the changes in cost and availability of commodities which could negatively affect our operating results.
Our profitability depends in part on our ability to anticipate and react to changes in commodity costs. Various factors beyond our control, including adverse weather conditions, governmental regulation and monetary policy, potential imposition of tariffs on imports from other countries, product availability, recalls of food products, and seasonality, as well as the effects of the current macroeconomic environment on our suppliers, may affect our commodity costs or cause a disruption in our supply chain. In an effort to mitigate some of this risk, we enter into fixed price agreements on some of our food and beverage products, including certain proteins, produce and cooking oil. As of the end of 2016, approximately 60% of our estimated 2017 annual food and beverage purchases were covered by fixed price contracts, most of which are scheduled to expire at various times during the 2017. Changes in the price or availability of commodities for which we do not have fixed price contracts could have a material adverse effect on our profitability. Expiring contracts with our food suppliers could also result in unfavorable renewal terms and therefore increase costs associated with these suppliers or may necessitate negotiations with alternate suppliers. We may be unable to obtain favorable contract terms with suppliers or adjust our purchasing practices and menu prices to respond to changing food costs, and a failure to do so could negatively affect our operating results.
We may experience interruptions in the delivery of food and other products from third parties.
Our restaurants depend on frequent deliveries of fresh produce, food, beverage and other products. This subjects us to the risk of interruptions in food and beverage supplies that may result from a variety of causes including, but not limited to, outbreaks of food-borne illness, disruption of operation of production facilities, the financial difficulties, including bankruptcy, of our suppliers or other unforeseen circumstances. Such shortages could adversely affect our revenue and profits. Our restaurants bear risks associated with the timeliness of deliveries by suppliers and distributors as well as the solvency, reputation, labor relationships, freight rates, and health and safety standards of each supplier and distributor. Other significant risks associated with our suppliers and distributors include improper handling of food and beverage products and/or the adulteration or contamination of such food and beverage products.

12


Price increases may negatively affect guest visits.
We may make future price increases, primarily to offset increased costs and operating expenses. We cannot provide assurance that any future price increases will not deter guests from visiting our restaurants, reduce the frequency of their visits, or affect their purchasing decisions.
The failure of our data security measures or a security breach involving our information technology systems could interrupt our business, damage our reputation, and negatively affect our operations and profits.
Our information technology systems, including technology services and systems for which we contract from third parties, communication systems and electronic data could be subject or vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, loss of data, unauthorized data breaches or other attempts to harm our systems. A failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or any other failure to maintain a continuous and secure cyber network could result in interruption to our services, adversely affect our reputation, and negatively impact our results of operations.
Moreover, we accept electronic payment cards from our guests for payment in our restaurants. In the ordinary course of our business, we receive and maintain certain personal information from our guests, team members, and vendors, and we process guest payments using payment information. A number of restaurant operators and retailers have experienced security breaches in which credit and debit card information may have been stolen. We employ secure network architecture technologies and practices, and have taken other steps to try to prevent such a breach; however, we may not have the resources or technical sophistication to prevent rapidly evolving types of cyber attacks. If we experienced a security breach, we could become subject to claims, lawsuits or other proceedings for purportedly fraudulent transactions arising out of the theft of credit or debit card information, compromised security and information systems, failure of our employees to comply with applicable laws, the unauthorized acquisition or use of such information by third parties, or other similar claims. Any such incidents or proceedings could disrupt the operation of our restaurants, adversely affect our reputation, guest confidence, and our results of operations, or result in the imposition of penalties or cause us to incur significant unplanned losses and expenditures, including those necessary to remediate any damage to persons whose personal information may have been compromised. We do not maintain a separate policy covering cyber security risks and, in light of recent court rulings and amendments to policy forms, there is uncertainty as to whether traditional commercial general liability policies will be construed to cover the expenses related to a cyber attack and breaches if credit and debit card information is stolen.
Because of the number of credit card transactions we process, we are required to maintain the highest level of PCI Data Security Standard compliance at our corporate offices and Company-owned restaurants. As part of an overall security program and to meet PCI standards, we undergo frequent external vulnerability scans and we are reviewed by a third party assessor. As PCI standards change, we may be required to implement additional security measures. If we do not maintain the required level of PCI compliance, we could be subject to costly fines or additional fees from the card brands that we accept, or lose our ability to accept those payment cards. Our franchisees are separate businesses that have different levels of compliance required depending on the number of credit card transactions processed. If our franchisees fail to maintain the appropriate level of PCI compliance or they experience a security breach, it could negatively impact their business operations, and we could face a loss of or reduction in royalties or other payments they are required to remit to us and it could adversely affect our reputation and guest confidence.
New or improved technologies or changes in consumer behavior facilitated by these technologies could negatively affect our business.
Advances in technologies or certain changes in consumer behavior driven by such technologies could have a negative effect on our business. Technology and consumer offerings continue to develop, and we expect that new or enhanced technologies and consumer offerings will be available in the future. We may pursue certain of those technologies and consumer offerings if we believe they offer a sustainable guest proposition and can be successfully integrated into our business model. However, we cannot predict consumer acceptance of these delivery channels or their impact on our business. In addition, our competitors, some of whom have greater resources than us, may be able to benefit from changes in technologies or consumer acceptance of such changes, which could harm our competitive position. There can be no assurance that we will be able to successfully respond to changing consumer preferences, including with respect to new technologies or to effectively adjust our product mix, service offerings, and marketing initiatives for products and services that address, and anticipate advances in, technology, and market trends. If we are not able to successfully respond to these challenges, our business, financial condition, and operating results could be harmed.

13


If there is a material failure in our information technology systems, our business operations and profits could be negatively affected, and our systems may be inadequate to support our future growth strategies.
We rely heavily on information technology systems in all aspects of our operations including our restaurant point-of sale systems, financial systems, marketing programs, employee engagement, supply chain management, cyber-security, and various other processes and transactions. Our ability to effectively manage and run our business depends on the reliability and capacity of our information technology systems, including technology services and systems for which we contract from third parties. These systems and services may be insufficient to effectively manage and run our business. These systems and our business needs will continue to evolve and require upgrading and maintenance over time, consequently requiring significant future commitments of resources and capital.
We rely on our management team for the development and execution of our business strategy and the loss of any member of our management team could negatively affect our operating results.
Our key team members are central to our success and difficult to replace. We may be unable to retain them or attract other highly qualified team members, particularly if we do not offer competitive employment terms. The loss of the services of any of our management team or the failure to implement an appropriate succession plan could prevent us from achieving our business strategy and initiatives, which could adversely affect our operating results.
Expanding our restaurant base is critical to our long-term growth and our ability to open and profitably operate new restaurants is subject to factors beyond our control.
Our initiatives include a focus on continued growth of our restaurant base through new restaurants. The expansion of our restaurant base depends in large part on our ability and the ability of our franchisees to timely and efficiently open new restaurants and to operate these restaurants on a profitable basis. Delays or failures in opening new restaurants, or the inability to profitably operate them once opened, could materially and adversely affect our planned growth. The success of our expansion strategy and the success of new restaurants depends upon numerous factors, many of which are beyond our control, including the following:
improvement in the macroeconomic environment nationally and regionally that affects restaurant-level performance and influences our decisions on the rate of expansion, timing, and the number of restaurants to be opened;
identification of and ability to secure an adequate supply of available and suitable restaurant sites;
negotiation of favorable lease and construction terms;
cost and availability of capital to fund restaurant expansion and operation;
the availability of construction materials and labor;
our ability to manage construction and development costs of new restaurants;
timely adherence to development schedules;
securing required governmental approvals and permits and in a timely manner;
availability and retention of qualified operating personnel to staff our new restaurants, especially managers;
competition in our markets and general economic conditions that may affect consumer spending or choice;
our ability to attract and retain guests; and
our ability to operate at acceptable profit margins.
We are subject to the risks presented by acquisitions.
As part of our expansion efforts, we have acquired some of our franchised restaurants in the past. In the future, we may, from time to time, consider opportunistic acquisitions of restaurants operated by franchisees or other operators. Any future acquisitions will be accompanied by the risks commonly encountered in acquisitions. These risks include among other things:
the difficulty of integrating operations and personnel;
the potential disruption to our ongoing business;
the potential distraction of management;
the inability to maintain uniform standards, controls, procedures and policies; and
the impairment of relationships with team members and guests as a result of changes in ownership and management.

14


New or less mature restaurants, once opened, may vary in profitability and levels of operating revenue for six months or more.
New and less mature restaurants typically experience higher operating costs in both dollars and percentage of revenue initially when compared to restaurants in the comparable restaurant base. Although the average unit volumes and restaurant level profit margins have performed well on average in recent years, there is no assurance that new restaurants will continue to experience such successes. Our restaurants are currently taking approximately six months or more to reach normalized operating levels due to inefficiencies typically associated with new restaurants. These include operating costs, which are often significantly greater during the first several months of operation and fluctuating guest counts. Further, there is no assurance that our less mature restaurants will attain operating results similar to those of our existing restaurants.
The large number of Company-owned restaurants concentrated in the western United States makes us susceptible to changes in economic and other trends in that region and restaurant expansion in our existing markets could erode sales of our existing restaurants.
As of December 25, 2016, a total of 182 or 39.1% of all Company-owned restaurants, representing 45.9% of restaurant revenue, were located in the western United States (i.e., Arizona, California, Colorado, Nevada, Oregon, Idaho, New Mexico, and Washington). As a result of our geographic concentration, negative publicity regarding any of our restaurants in the western United States could have a material adverse effect on our business and operations, as could other regional occurrences such as local strikes, energy shortages, or increases in energy prices, droughts, earthquakes, fires, or other natural disasters.
Because we typically draw guests from a relatively small radius around each of our restaurants, the sales performance, and guest counts for existing restaurants near the area in which a new restaurant opens may decline due to the opening of the new restaurant.
Our revenues and operating results may fluctuate significantly due to various risks and unexpected circumstances, including increases in costs, seasonality, weather, and other factors outside our control.
We are subject to a number of significant risks that might cause our actual quarterly and annual results to fluctuate significantly or be negatively affected. These risks include but are not limited to: extended periods of inclement weather which may affect guest visits as well as limit the availability and cost of key commodities such as beef, poultry, potatoes, and other items that are important ingredients in our products; material disruptions in our supply chain; changes in borrowings and interest rates; changes to accounting methods or philosophies; impairment of long-lived assets, including goodwill, and losses on restaurant closures; and unanticipated expenses from natural disasters and repairs to damaged or lost property.
Moreover, our business fluctuates seasonally. Historically, sales in most of our restaurants have been higher during the summer months and winter holiday season. As a result, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly as a result of seasonality and the factors discussed above. 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, and comparable restaurant sales for any particular future period may decrease.
Our franchisees could take actions that could harm our business, expose us to liability or damage our reputation.
Franchisees are independent entities and are not our employees, partners, or affiliates. We share with our franchisees what we believe to be best practices in the restaurant industry; however, franchisees operate their restaurants as independent businesses. Consequently, the quality of franchised restaurant operations may be diminished by any number of factors beyond our control. Moreover, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements or may not hire and train qualified managers and other restaurant personnel. In addition, as independent businesses, franchisees may not be required to comply with the same levels of business or regulatory compliance that we are. While we try to ensure that the quality of our brand and compliance with our operating standards, and the confidentiality thereof, are maintained by all of our franchisees, we cannot provide assurance that our franchisees will avoid actions that negatively affect the reputation of Red Robin or the value of our proprietary information. Our image and reputation and the image and reputation of other franchisees may suffer materially, and system-wide sales could significantly decline if our franchisees do not operate restaurants according to our standards.
Further, we are subject to federal and state laws that regulate the offer and sale of franchises and aspects of the licensor-licensee relationship. Also, there may be circumstances in which we may be held liable for the actions of our franchisees. In a 2014 action, the National Labor Relations Board (NLRB) alleged that McDonald’s USA, LLC (the parent-franchisor company for McDonald’s restaurants) could be jointly liable for labor and wage violations by its franchisees. If upheld, liability for franchisees’ overtime, wage, or union-organization violations could be pursued against us. Failure to comply with the laws and

15


regulations governing our franchisee relationships or adverse decisions similar to the above-described NLRB action could subject us to liability for actions of the franchisees, or expose us to liability to franchisees, or fines and penalties for non-compliance.
Decreased cash flow from operations, or an inability to access credit could negatively affect our business initiatives or may result in our inability to execute our revenue, expense, and capital deployment strategies.
Our ability to fund our operating plans and to implement our capital deployment strategies depends on sufficient cash flow from operations or other financing, including using funding under our revolving credit agreement. Our capital deployment strategies include but are not limited to repurchases of our stock, paying down debt, new restaurant development, our brand transformation initiative, investment in advertising, and franchise expansion. If we experience decreased cash flow from operations, our ability to fund our operations and planned initiatives, and to take advantage of growth opportunities, may be delayed or negatively affected. In addition, these disruptions or a negative effect on our revenues could affect our ability to borrow or comply with our covenants under our credit facility. Moreover, any repurchase by us of our shares of common stock will further reduce cash available for operations and future growth, as well as debt repayment.
Our future success depends on our ability to protect our intellectual property.
Our business prospects will depend in part on our ability to protect our proprietary information and intellectual property, including the Red Robin, Red Robin Gourmet Burgers®, Red Robin America’s Gourmet Burgers & Spirits®, Red Robin Burger Works®, “YUMMM®”, Red Robin Gourmet Burgers and BrewsTM, and Red Robin RoyaltyTM names and logos. We have registered or filed applications for trademarks for these names and logos, among others, with the United States Patent and Trademark Office and in Canada and we have applied to register various trademarks in certain other international jurisdictions. Our trademarks could be infringed in ways that leave us without redress, such as by imitation or by filings by others in jurisdictions where we are not currently registered. In addition, we rely on trade secrets and proprietary know-how in operating our restaurants, and we employ various methods to protect those trade secrets and that proprietary know-how. However, such methods may not afford adequate protection and others could independently develop similar know-how or obtain access to our know-how, concepts, and recipes. Consequently, our business could be negatively affected and less profitable if we are unable to successfully defend and protect our intellectual property.
We are subject to economic, political, regulatory, and other risks related to our international operations.
As of December 25, 2016, we owned 18 Red Robin restaurants in Canada and may have further international expansion in the future. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic, and political risks that are different from and incremental to those in the United States. In addition to the risks that we face in the United States, our international operations involve risks that could adversely affect our business, including:
the need to adapt our brand for specific cultural and language differences:
new and different sources of competition;
difficulties and costs associated with staffing and managing foreign operations;
difficulties in adapting and sourcing product specifications for international restaurant locations;
fluctuations in currency exchange rates, which could impact revenues and expenses of our international operations and expose us to foreign currency exchange rate risk;
difficulties in complying with local laws, regulations, and customs in foreign jurisdictions;
unexpected changes in regulatory requirements;
political or social unrest and economic instability; compliance with U.S. laws such as the Foreign Corrupt Practices Act, and similar laws in foreign jurisdictions;
differences in enforceability of intellectual property and contract rights;
adverse tax consequences;
profit repatriation and other restrictions on the transfer of funds; and
different and more stringent user protection, data protection, privacy and other laws.
Our failure to manage any of these risks successfully could harm our future international operations and our overall business, and results of our operations.

16


Risks Related to the Restaurant Industry
Food safety and food-borne illness concerns and any related unfavorable publicity could have an adverse effect on our business.
We dedicate substantial resources to ensuring our guests enjoy safe, quality food products. Nonetheless, restaurant businesses such as ours can be adversely affected by publicity resulting from complaints or litigation regarding poor food quality, food-borne illness, personal injury, food tampering, communicable disease, adverse health effects of consumption of various food products or high-calorie foods, or other concerns. Food safety issues also could be caused by food suppliers or distributors and, as a result, could be out of our control. Regardless of the source or cause, any report of food-borne illnesses such as E. coli, norovirus, listeria, hepatitis A, salmonella, or trichinosis, and other food safety issues including food tampering or contamination, at one of our or a franchisee’s restaurants, could adversely affect our reputation and have a negative impact on our sales. The occurrence of food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and lower margins.
Health concerns relating to the consumption of beef, chicken, or other food products could affect consumer preferences and could negatively affect our results of operations.
Consumer preferences could be affected by health concerns about food-related illness, the consumption of beef, which is the key ingredient in many of our menu items, or negative publicity or publication of government or industry findings concerning food quality, illness, and injury. Further, consumers may react negatively to reports concerning our food products or health or other concerns or operating issues stemming from one or more of our restaurants. Such negative publicity, whether or not valid, may negatively affect demand for our food and could result in decreased guest traffic to our restaurants. A decrease in guest traffic to our restaurants as a result of these health concerns or negative publicity or as a result of a change in our menu or concept could materially harm our business and negatively affect our profitability.
Our business could be adversely affected by increased labor costs, including costs related to the increase in minimum wage and new heath care laws.
Labor is a primary component in the cost of operating our business. Increased labor costs, whether due to competition, unionization, increased minimum and tip wage, state unemployment rates, employee benefits costs, or otherwise, may adversely impact our operating expenses. A considerable amount of our restaurant team members are paid at rates related to the federal, state, or local minimum wage. Further, we have a substantial number of restaurants located in states or municipalities where the minimum wage is greater than the federal minimum wage, including California, Washington, and New York. For example, California enacted legislation that increased its minimum wage from $10 an hour to $10.50 an hour effective January 2017 for businesses with 26 or more employees, and which then increase each year until reaching $15 per hour in 2022. We anticipate additional legislation increasing minimum wage standards will be enacted in future periods and in other jurisdictions. The Patient Protection and Affordable Care Act of 2010 (the “PPACA”) includes provisions requiring health care coverage for all Americans that began in 2014. In the past, many of our eligible team members chose not to participate in our Company sponsored health care plans for various reasons but we expect to continue to see increased costs due to the impact of changes in the health care laws, including as a result of any repeal or replacement of PPACA. Our distributors and suppliers also may be affected by higher minimum wage or health care costs, which could result in higher costs for goods and services supplied to us. In addition, a shortage in the labor pool or other general inflationary pressures or changes could also increase our labor costs. In the past, we have been able to offset increases in labor costs by improving our productivity in our restaurants or taking gradual increases in pricing but there is no guarantee that we can continue to do so in the future. If our labor costs increase and we are not able to offset costs through productivity or efficiency gains, or pass along the costs in the form of increased prices to our guests, then it could have a material adverse effect on our results of operations.
Labor organizing could adversely affect our operations and harm our competitive position in the restaurant industry, which could harm our financial performance.
Our employees or others may attempt to unionize our workforce, establish boycotts or picket lines or interrupt our supply chains which could increase our labor costs, limit our ability to manage our workforce effectively, and cause disruptions to our operations. A loss of our ability to effectively manage our workforce and the compensation and benefits we offer to our staff members could harm our financial performance.

17


Our failure to remain in compliance with governmental laws and regulations as they continually evolve, and the associated costs of compliance, could cause our business results to suffer.
Our business is subject to various federal, state, and local government laws and regulations, including, among others, those relating to our employees, public health and safety, food safety, nutritional disclosure, alcoholic beverage control, public accommodations, and financial and disclosure reporting and controls. These laws and regulations continually evolve and change. We may fail to maintain compliance with all laws and regulations despite our best efforts. Changes in applicable laws and regulatory requirements, or failure to comply with them could result in, among other things, increased exposure to litigation, administrative enforcement actions or governmental investigations or proceedings; revocation of required licenses or approvals; fines; and civil and criminal liability. These negative consequences could increase the cost of or interfere with our ability to operate our business and execute our strategies.
Various federal, state, and local employment laws govern our relationship with our team members and affect operating costs. These laws govern employee classification, wage rates and payment requirements including tip credit laws, meal and rest breaks, unemployment and other taxes, health care and benefits, workers’ compensation rates, citizenship or residency requirements, labor relations, child labor regulations, and discriminatory conduct. Changes in these laws or our failure to comply with enforcement requirements could require changes to our operations that could harm our operating results. For example, although we require all of our team members to provide us with the government-specified documentation evidencing their employment eligibility, some of our team members, without our knowledge, may not meet federal citizenship or residency requirements, which could lead to a disruption in our work force.
We are subject to “dram shop” statutes in some states. These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to such intoxicated person. Failure to comply with alcoholic beverage control or dram shop regulations could subject the Company to liability and could negatively affect our business.
A significant increase in litigation could have a material adverse effect on our results of operations, financial condition and business prospects.
As a member of the restaurant industry, we are sometimes the subject of complaints or litigation, including class action lawsuits, from guests alleging illness, injury, or other food quality, health, or operational concerns. Negative publicity resulting from these allegations could harm our restaurants, regardless of whether the allegations are valid or whether we are liable. In fact, we are subject to the same risks of negative publicity resulting from these sorts of allegations even if the claim actually involves one of our franchisees.
In addition, any failure by us to comply with the various federal and state labor laws governing our relationship with our team members including requirements pertaining to minimum wage, overtime pay, meal and rest breaks, unemployment tax rates, workers’ compensation rates, citizenship or residency requirements, child labor regulations, and discriminatory conduct, may have a material adverse effect on our business or operations. We have been subject to such claims from time to time. The possibility of a material adverse effect on our business relating to employment litigation is even more pronounced given the high concentration of team members employed in the western United States, as this region, and California in particular, has a substantial amount of legislative and judicial activity pertaining to employment-related issues. Further, employee claims against us based on, among other things, discrimination, harassment, or wrongful termination may divert our financial and management resources that would otherwise be used to benefit the future performance of our operations.
ITEM 1B.    Unresolved Staff Comments
None.
ITEM 2.    Properties
We currently lease the real estate for most of our Company-owned restaurant facilities under operating leases with remaining terms ranging from less than one year to over 15 years excluding options to extend. These leases generally contain options which permit us to extend the lease term at an agreed rent or at prevailing market rates. Certain leases provide for contingent rents, which are determined as a percentage of adjusted gross restaurant sales in excess of specified levels. We record a contingent rent liability and the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the year is probable. Certain lease agreements also require the Company to pay maintenance, insurance, and property tax costs.

18


We own real estate for 36 Company-owned restaurants located in Arizona (4); Arkansas (1); California (1); Colorado (3); Florida (1); Georgia (1); Illinois (1); Indiana (1); Maryland (1); Missouri (1); North Carolina (3); Ohio (4); Pennsylvania (3); Texas (5); Virginia (4); and Washington (2).
Our corporate headquarters is located in Greenwood Village, Colorado. We occupy this facility under a lease that expires on May 31, 2018. We operate a test kitchen and training facility in located in Englewood, Colorado under a lease that expires December 31, 2022.
Our current prototype for new Red Robin restaurants is approximately 4,500 to 5,800 square feet with a capacity of approximately 145 to 200 seats. We develop restaurants under ground leases on which we build our own restaurant in addition to using in-line, end cap, and mall locations. As of December 25, 2016, our restaurant locations comprised approximately 2.9 million square feet.
ITEM 3.    Legal Proceedings
In the normal course of business, there are various claims in process, matters in litigation, and other contingencies. These include employment related claims and claims from guests or team members alleging illness, injury, food quality, health, or operational concerns. To date, no claims of these types of litigation, 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.
ITEM 4.    Mine Safety Disclosures
Not applicable.

19


PART II
ITEM 5.    Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on The NASDAQ Global Select Market under the symbol RRGB. The table below sets forth the high and low per share sales prices for our common stock as reported by The NASDAQ Global Select Market for the indicated periods (based on our fiscal quarters).
 
 
Sales Price
 
 
High
 
Low
2016
 
 
 
 
4th Quarter
 
$
58.65

 
$
40.85

3rd Quarter
 
54.87

 
44.08

2nd Quarter
 
67.05

 
46.70

1st Quarter
 
68.97

 
55.79

2015
 
 
 
 
4th Quarter
 
$
82.66

 
$
60.07

3rd Quarter
 
95.00

 
73.35

2nd Quarter
 
92.78

 
70.90

1st Quarter
 
89.46

 
71.37

As of February 20, 2017, there were 107 registered owners of our common stock.
Dividends
We did not declare or pay any cash dividends on our common stock during 2016 and 2015. We currently anticipate that we will retain any future cash flow to fund our operations and expansion of our business, to pay down debt, or to repurchase stock. In addition, our credit agreement may limit us from declaring or paying any dividends or making any other repurchases on any of our shares under certain circumstances, and are subject to the leverage ratio under our credit agreement.
Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on then existing conditions including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects, and other factors our board of directors may deem relevant.
Issuer Purchases of Equity Securities
During the fiscal quarter ended December 25, 2016, the Company did not have any sales of securities in transactions that were not registered under the Securities Act that have not been reported in a Current Report on Form 8-K. The table below provides a summary of the Company’s purchases of its own common stock during the fourth quarter of 2016.
Period(1)
 
Total Number
of Shares (or
Units)
Purchased
 
Average
Price Paid
per Share
(or Unit)
 
Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs(2)
 
Maximum Dollar Value that May Yet Be Purchased
Under the Plans or Programs(2) (in thousands)
10/3/16-10/30/16
 
179,117

 
$
45.02

 
803,075

 
$
60,417

10/31/16-11/27/16
 
136,959

 
$
47.42

 
940,034

 
$
53,922

Pursuant to Publicly Announced Plans or Programs(2)
 
316,076

 
 
 
 

 
 

___________________________________
(1)
The reported periods conform to the Company’s fiscal calendar composed of thirteen 28-day periods.
(2)
On February 11, 2016, the Company’s board of directors re-authorized the Company’s share repurchase program and approved the repurchase of up to $100 million of the Company’s common stock. The share repurchase authorization became effective on February 11, 2016, and will terminate upon completing the repurchase of $100 million of common stock unless otherwise terminated by the board. Purchases under the repurchase program may be made in open market or privately negotiated transactions. Purchases may be made from time to time at the Company’s

20


discretion and the timing and amount of any share repurchases will be determined based on share price, market conditions, legal requirements, and other factors. The repurchase program does not obligate the Company to acquire any particular amount of common stock, and the Company may suspend or discontinue the repurchase program at any time. Since February 11, 2016, the Company has purchased 940,034 shares for a total of $46.1 million. The current repurchase program had remaining authorized funds of $53.9 million as of December 25, 2016.
Performance Graph
The following graph compares the yearly percentage in cumulative total stockholders’ return on Common Stock of the Company since December 23, 2011, with the cumulative total return over the same period for (i) the Russell 3000 Index, and (ii) the Bloomberg Casual Restaurants Index.
Pursuant to rules of the SEC, the comparison assumes $100 was invested on December 23, 2011, the last trading day in the Companys 2011 fiscal year, in the Companys Common Stock and in each of the indices.
This performance graph shall not be deemed to be “soliciting material” or to be “filed” under either the Securities Act or the Exchange Act.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Red Robin Gourmet Burgers, Inc., The Russell 3000 Index
and Bloomberg Casual Restaurants Index
a5yearcumulativereturn.jpg
 
Fiscal Years Ended
 
December 25, 2011
 
December 30, 2012
 
December 29, 2013
 
December 28, 2014
 
December 27, 2015
 
December 25, 2016
Red Robin Gourmet Burgers, Inc. 
$
100.00

 
116.27

 
259.79

 
263.97

 
213.61

 
194.99

Russell 3000
100.00

 
113.04

 
152.05

 
173.13

 
172.22

 
193.33

Bloomberg Casual Restaurants
100.00

 
111.68

 
165.57

 
184.53

 
154.13

 
145.45

___________________________________
*
$100 invested on December 23, 2011 in stock or index, including reinvestment of dividends based on calendar years ending December 31 for purposes of comparability.

21


ITEM 6.    Selected Financial Data
The table below contains selected consolidated financial and operating data. The statement of income, cash flow, and balance sheet data for each fiscal year has been derived from our consolidated financial statements. You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.
 
 
Fiscal Year Ended
 
 
December 25, 2016
 
December 27, 2015
 
December 28, 2014
 
December 29, 2013
 
December 30, 2012
(in thousands, except per share data)
 
(52 Weeks)
 
(52 Weeks)
 
(52 Weeks)
 
(52 Weeks)
 
(53 Weeks)
Statement of Income Data:
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
Restaurant revenue
 
$
1,280,669

 
$
1,238,898

 
$
1,129,135

 
$
1,000,198

 
$
960,994

Total revenues
 
1,296,441

 
1,257,592

 
1,146,102

 
1,017,247

 
977,132

Total costs and expenses(1)(2)(3)(4)
 
1,284,871

 
1,190,547

 
1,101,418

 
973,433

 
931,923

Income from operations
 
11,570

 
67,045

 
44,684

 
43,814

 
45,209

Net income
 
11,725

 
47,704

 
32,561

 
32,239

 
28,331

Earnings per share:
 
 
 
 
 
 

 
 

 
 

Basic
 
$
0.88

 
$
3.40

 
$
2.29

 
$
2.27

 
$
1.97

Diluted
 
$
0.87

 
$
3.36

 
$
2.25

 
$
2.22

 
$
1.93

Shares used in computing earnings per share:
 
 
 
 
 
 

 
 

 
 

Basic
 
13,332

 
14,042

 
14,237

 
14,225

 
14,411

Diluted
 
13,462

 
14,216

 
14,447

 
14,510

 
14,669

Balance Sheet Data:
 
 
 
 
 
 

 
 

 
 

Cash and cash equivalents
 
$
11,732

 
$
22,705

 
$
22,408

 
$
17,108

 
$
22,440

Total assets
 
918,545

 
839,979

 
735,889

 
634,645

 
597,132

Long-term debt, including current portion
 
347,838

 
210,847

 
147,896

 
88,714

 
134,995

Total stockholders’ equity
 
348,053

 
374,311

 
359,771

 
347,403

 
306,919

Cash Flow Data:
 
 
 
 
 
 

 
 

 
 

Net cash provided by operating activities
 
$
98,957

 
$
140,923

 
$
123,581

 
$
113,529

 
$
94,379

Net cash used in investing activities
 
(199,379
)
 
(169,111
)
 
(155,278
)
 
(78,231
)
 
(63,305
)
Net cash provided by (used in) financing activities
 
89,333

 
28,767

 
37,051

 
(40,630
)
 
(43,670
)
Selected Operating Data:
 
 
 
 
 
 

 
 

 
 

Net sales per square foot in Company-owned restaurants
 
$
449

 
$
466

 
$
462

 
$
451

 
$
449

Total operating weeks(5)
 
23,799

 
22,006

 
20,070

 
18,012

 
17,607

Company-owned restaurants open at end of period
 
465

 
439

 
415

 
361

 
339

Franchised restaurants open at end of period
 
86

 
99

 
99

 
134

 
133

Comparable restaurant net sales increase (decrease)(6)(7)
 
(3.3
)%
 
2.1
%
 
3.1
%
 
4.0
%
 
1.1
%
___________________________________
(1)
2016 includes pre-tax non-cash asset impairment charges of $24.4 million related to the impairment of 19 restaurants and $0.8 million related to the relocation of a restaurant. 2016 also includes pre-tax costs of $6.7 million related to the closure of nine Red Robin Burger Works restaurants and $0.7 million related to acquiring 13 franchised restaurants.
(2)
2015 includes pre-tax non-cash asset impairment charges of $0.6 million related to the impairment of two restaurants.

22


(3)
2014 includes pre-tax costs of $1.8 million related to acquiring 36 franchised restaurants. 2014 also includes a pre-tax non-cash asset impairment charge of $8.8 million, of which $7.6 million related to the impairment of in-development software, and $1.2 million related to the impairment of three restaurants.
(4)
2013 includes pre-tax non-cash asset impairment charges of $1.5 million related to the impairment of four restaurants.
(5)
Total operating weeks represent the number of weeks that the Company-owned restaurants were open during the reporting period.
(6)
Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revenues” for a further discussion of our comparable restaurant designation.
(7)
Comparable restaurant sales increase and average annual comparable restaurant sales volumes for 2012 were calculated on a 53-week basis by adjusting fiscal year 2011 as if there were 53 weeks.
ITEM 7.    Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
Description of the Business
Red Robin Gourmet Burgers, Inc., a Delaware corporation, together with its subsidiaries (“Red Robin,” “we,” “us,” “our” or the “Company”), primarily develops, operates, and franchises full-service restaurants with 551 locations in North America. As of December 25, 2016, the Company’s fiscal year end, we operated 465 Company-owned restaurants located in 39 states and two Canadian provinces. The Company also had 86 casual-dining restaurants operated by franchisees in 15 states as of December 25, 2016. The Company operates its business as one operating and one reportable segment.
Our primary source of revenue is from the sale of food and beverages at Company-owned restaurants. We also earn revenue from royalties and fees from franchised restaurants.
The Company’s fiscal year ends on the last Sunday of each calendar year. Most of our fiscal years have 52 weeks; however, we experience a 53rd week once every five or six years. Our discussion for fiscal years 2016, 2015, and 2014, which ended on December 25, 2016, December 27, 2015, and December 28, 2014 refers to a 52-week period in each case.
Financial and Operational Highlights
The following summarizes the financial and operational highlights of 2016 and our 2017 outlook:
Financial Performance.
Restaurant revenue increased $41.8 million, or 3.4%, to $1.3 billion for the 52 weeks ended December 25, 2016 as compared to $1.2 billion for the 52 weeks ended December 27, 2015, primarily due to a $86.9 million increase in revenue from newly opened and acquired restaurants, partially offset by a $38.9 million decrease in comparable restaurant revenue, $4.5 million from closed restaurants, and a $1.7 million unfavorable foreign exchange impact related to our Canadian restaurants. We expect total revenues to grow between 6% and 8% in 2017, comprising comparable revenue growth of 0.5% to 1.5% and increased operating weeks associated with locations opened in 2016 and 2017, as well as the 53rd week in 2017.
Restaurant operating costs, as a percentage of restaurant revenue, increased 190 basis points to 79.6% in 2016 compared to 77.7% in 2015. The increase was primarily due to higher labor costs, other restaurant operating costs, and occupancy, as a percentage of restaurant revenue, and was partially offset by a reduction in food and beverage costs.
Net income decreased to $11.7 million in 2016 from $47.7 million in 2015. Diluted earnings per share decreased to $0.87 as compared to $3.36 in fiscal year 2015. Excluding the impact of a $1.65 per diluted share related to asset impairment and restaurant closure costs, $0.20 per diluted share related to litigation contingencies, and $0.06 per diluted share related to reorganization costs, net income per diluted share in 2016 was $2.78. Excluding the impact of $0.06 per diluted share related to the change in accounting estimate for gift card breakage, and a non-cash charge of $0.02 per diluted share related to the impairment of two underperforming restaurants, net income per diluted share in 2015 was $3.32.
We purchased $46.1 million of common stock in 2016 through our share repurchase program.

23


Marketing. Our Red Robin Royalty™ loyalty program operates in all of our U.S. and Canada Company-owned Red Robin restaurants and has been rolled out to most of our franchised restaurants. We engage our guests through Red Robin Royalty with offers designed to increase frequency of visits as a key part of our overall marketing strategy. We also inform enrolled guests early about new menu items to generate awareness and trial. Our media buying approach is concentrated on generating significant reach and frequency while on-air. In addition, we use digital, social, and earned media to target and more effectively reach specific segments of our guest base. In 2017, we plan to promote new items and value menus.
Brand Transformation Initiative. In 2012, we began investing in our brand transformation program to enhance our service, food presentation, atmosphere, and other guest experiences. Key elements of the restaurant remodel associated with our brand transformation include greater separation of the bar and family dining area and refreshed exteriors including signage. In 2016, we remodeled 84 Red Robin restaurants to our new brand standards and have substantially completed the transformation process for Company-owned restaurants. Our franchisees are currently working to conform their restaurants to these new design standards through 2018.
Restaurant Development. During 2016, we opened 26 Company-owned Red Robin restaurants, acquired 13 Red Robin restaurants from a franchisee, and relocated two Red Robin restaurants. In 2017, we plan to open approximately 17 new Company-owned Red Robin restaurants.
Restaurant Data
The following table details data pertaining to the number of Company-owned and franchised restaurants for the fiscal years 2016, 2015, and 2014.
 
 
2016
 
2015
 
2014
Company-owned:
 
 
 
 
 
 
Beginning of period
 
439

 
415

 
361

Opened during the period
 
26

 
24

 
22

Acquired from franchisee
 
13

 
1

 
36

Closed during the period
 
(13
)
 
(1
)
 
(4
)
End of period
 
465

 
439

 
415

Franchised:
 
 
 
 
 
 
Beginning of period
 
99

 
99

 
134

Opened during the period
 

 
1

 
2

Sold or closed during the period
 
(13
)
 
(1
)
 
(37
)
End of period
 
86

 
99

 
99

Total number of restaurants
 
551

 
538

 
514



24


Results of Operations
Operating results for each fiscal year 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 revenues:
 
 
2016
 
2015
 
2014
 
 
(52 Weeks)
 
(52 Weeks)
 
(52 Weeks)
Revenues:
 
 
 
 
 
 
Restaurant
 
98.8
 %
 
98.5
%
 
98.5
 %
Franchise royalties and fees
 
0.9

 
1.0

 
1.2

Other revenue
 
0.3

 
0.5

 
0.3

Total revenues
 
100.0
 %
 
100.0
%
 
100.0
 %
Costs and expenses:
 
 
 
 
 
 
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
 
 
 
 
 
 
Cost of sales
 
23.3

 
24.6

 
25.4

Labor
 
34.3

 
32.6

 
33.0

Other operating
 
13.6

 
12.4

 
12.5

Occupancy
 
8.4

 
8.1

 
7.7

Total restaurant operating costs
 
79.6

 
77.7

 
78.6

Depreciation and amortization
 
6.7

 
6.2

 
5.6

Selling, general, and administrative
 
10.5

 
11.4

 
11.5

Pre-opening costs
 
0.6

 
0.6

 
0.7

Asset impairment and restaurant closure costs
 
2.7

 

 
0.8

Income from operations
 
0.9

 
5.3

 
3.9

Other (income) expense:
 
 
 
 
 
 
Interest expense
 
0.5

 
0.3

 
0.3

Interest income and other, net
 

 

 
(0.1
)
Total other expenses
 
0.5

 
0.3

 
0.2

Income before income taxes
 
0.4

 
5.0

 
3.7

(Benefit) provision for income taxes
 
(0.5
)
 
1.2

 
0.8

Net income
 
0.9
 %
 
3.8
%
 
2.8
 %
___________________________________
Certain percentage amounts in the table above do not total due to rounding as well as the fact that restaurant operating costs are expressed as a percentage of restaurant revenues and not total revenues.

25


Revenues
(Revenues in thousands)
 
2016
 
2015
 
2016 - 2015 Percent Change
 
2014
 
2015 - 2014 Percent Change
Restaurant revenue
 
$
1,280,669

 
$
1,238,898

 
3.4
 %
 
$
1,129,135

 
9.7
 %
Franchise royalties and fees
 
11,209

 
12,526

 
(10.5
)%
 
13,637

 
(8.1
)%
Other revenue
 
4,563

 
6,168

 
(26.0
)%
 
3,330

 
85.2
 %
Total revenues
 
$
1,296,441

 
$
1,257,592

 
3.1
 %
 
$
1,146,102

 
9.7
 %
Average weekly net sales volumes in Company-owned restaurants(1)(2)
 
$
54,681

 
$
57,242

 
(4.5
)%
 
$
56,652

 
1.0
 %
Total operating weeks
 
23,799

 
22,006

 
8.1
 %
 
20,070

 
9.6
 %
Net sales per square foot
 
$
449

 
$
466

 
(3.6
)%
 
$
462

 
0.9
 %
___________________________________
(1)
Excludes Red Robin Burger Works.
(2)
Calculated using historical currency rates. Using constant currency rates, the average weekly sales per unit for 2015 for Company-owned restaurants was $57,161. The Company calculates non-GAAP constant currency average weekly sales per unit by translating prior year local currency average weekly sales per unit to U.S. dollars based on current year average exchange rates.
Restaurant revenue, which comprises almost entirely food and beverage sales, increased by $41.8 million, or 3.4%, for the 52 weeks ended December 25, 2016 as compared to the 52 weeks in 2015. The increase was primarily due to a $86.9 million increase in revenue from newly opened and acquired restaurants, partially offset by a $38.9 million or 3.3% decrease in comparable restaurant revenue, $4.5 million from closed restaurants, and a $1.7 million unfavorable foreign exchange impact related to our Canadian restaurants. The comparable restaurant revenue decrease was driven by a 3.4% decrease in guest counts and a 0.1% unfavorable foreign exchange impact related to our Canadian restaurants, partially offset by a 0.2% increase in average guest check.
Restaurant revenue increased by $109.8 million, or 9.7%, for the 52 weeks ended December 27, 2015 as compared to the 52 weeks in 2014. Restaurants acquired in 2014 and 2015 contributed $46.7 million, net of a $2.9 million unfavorable impact of foreign currency exchange rates. New restaurant openings, net of closures, contributed $41.1 million of the increase. Comparable restaurant revenue grew $22.0 million or 2.1%. Comparable restaurant revenue growth resulted from a 2.5% increase in average guest check and a 0.4% decrease in guest counts.
Average weekly sales volumes represent the total restaurant revenue for all Company-owned Red Robin casual dining restaurants for each time period presented, divided by the number of operating weeks in the period. Comparable restaurant revenues include those restaurants that are in the comparable base at the end of each period presented. New restaurants are restaurants that are open but by definition not included in the comparable category because they have not operated for five full quarters. Fluctuations in average weekly net sales volumes for Company-owned restaurants reflect the effect of comparable restaurant revenue changes as well as the performance of new and acquired restaurants during the period and the average square footage of our restaurants.
Franchise royalties and fees comprise primarily royalty income and initial franchise fees. Franchise royalties and fees decreased $1.3 million or 10.5%, from 2015, primarily related to the loss of royalties from 14 franchised restaurants that we acquired in 2015 and 2016. Our franchisees reported that comparable restaurant revenue decreased 2.0% in 2016 as compared to 2015. The decrease in franchise royalties and fees in 2015 from 2014 is primarily related to the royalties from 37 franchised restaurants that we acquired in 2014 and 2015, partially offset by an increase in franchise royalties from existing and new franchise locations. Our franchisees reported that comparable restaurant revenue increased 4.9% in 2015 as compared to 2014.
Other revenue comprises primarily gift card breakage and licensing royalties. For the fiscal years ended December 25, 2016, December 27, 2015, and December 28, 2014, we recognized $3.5 million, $5.1 million, and $2.3 million of gift card breakage. Gift card breakage revenue in 2015 was higher due to a change in accounting estimate for gift card breakage.

26


Cost of Sales
(In thousands, except percentages)
 
2016
 
2015
 
2016 - 2015 Percent Change
 
2014
 
2015 - 2014 Percent Change
Cost of sales
 
$
298,249

 
$
304,637

 
(2.1
)%
 
$
287,221

 
6.1
 %
As a percent of restaurant revenue
 
23.3
%
 
24.6
%
 
(1.3
)%
 
25.4
%
 
(0.8
)%
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 130 basis points in 2016 compared to 2015. The decrease was mainly driven by food cost deflation, primarily related to ground beef, along with favorable menu mix and pricing.
Cost of sales as a percentage of restaurant revenue decreased 80 basis points in 2015 compared to 2014. The decrease was driven by favorable menu mix and pricing, in addition to food cost deflation, primarily related to ground beef.
Labor
(In thousands, except percentages)
 
2016
 
2015
 
2016 - 2015 Percent Change
 
2014
 
2015 - 2014 Percent Change
Labor
 
$
439,232

 
$
403,517

 
8.9
%
 
$
372,657

 
8.3
 %
As a percent of restaurant revenue
 
34.3
%
 
32.6
%
 
1.7
%
 
33.0
%
 
(0.4
)%
Labor costs include restaurant-level hourly wages and management salaries as well as related taxes and benefits. In 2016, labor as a percentage of restaurant revenue increased 170 basis points compared to 2015. This increase was primarily driven by increases in the minimum wages in certain states, higher manager salaries due to sales deleverage, and an increase in health insurance costs, partially offset by a decrease in management bonus.
In 2015, labor as a percentage of restaurant revenue decreased 40 basis points compared to 2014. This decrease primarily resulted from a decrease in health insurance and workers’ compensation costs as well as the leverage of higher sales volumes, partially offset by higher average hourly rates.
Other Operating
(In thousands, except percentages)
 
2016
 
2015
 
2016 - 2015 Percent Change
 
2014
 
2015 - 2014 Percent Change
Other operating
 
$
173,977

 
$
154,344

 
12.7
%
 
$
140,972

 
9.5
 %
As a percent of restaurant revenue
 
13.6
%
 
12.4
%
 
1.2
%
 
12.5
%
 
(0.1
)%
Other operating costs include costs such as equipment repairs and maintenance costs, restaurant supplies, utilities, restaurant technology, and other miscellaneous costs. During 2016, other operating costs as a percentage of restaurant revenue increased 120 basis points over the prior year, primarily due to higher costs of equipment repairs and maintenance, restaurant technology, credit card fees, and local marketing spending.
During 2015, other operating costs as a percentage of restaurant revenue decreased 10 basis points over the prior year, as lower utility and supply costs were partially offset by higher credit card fees and costs of restaurant technology.
Occupancy
(In thousands, except percentages)
 
2016
 
2015
 
2016 - 2015 Percent Change
 
2014
 
2015 - 2014 Percent Change
Occupancy
 
$
107,408

 
$
100,007

 
7.4
%
 
$
86,734

 
15.3
%
As a percent of restaurant revenue
 
8.4
%
 
8.1
%
 
0.3
%
 
7.7
%
 
0.4
%
Occupancy costs include fixed rents, property taxes, common area maintenance charges, general liability insurance, contingent rents, and other property costs. Occupancy costs incurred prior to opening our new restaurants are included in pre-opening costs. In 2016, occupancy costs as a percentage of restaurant revenue increased 30 basis points over the prior year, primarily due to sales deleverage. Our fixed rents for the fiscal years ended December 25, 2016 and December 27, 2015 were $71.9 million and $65.5 million, an increase of $6.4 million due to 39 locations opened and acquired since 2015.

27


In 2015, occupancy costs increased $13.3 million or 40 basis points over the prior year, primarily due to an increase in fixed rents and general liability insurance related to the restaurants acquired and opened since 2014. Our fixed rents for the fiscal years ended December 27, 2015 and December 28, 2014 were $65.5 million and $56.6 million.
Depreciation and Amortization
(In thousands, except percentages)
 
2016
 
2015
 
2016 - 2015 Percent Change
 
2014
 
2015 - 2014 Percent Change
Depreciation and amortization
 
$
86,695

 
$
77,374

 
12.0
%
 
$
64,579

 
19.8
%
As a percent of total revenues
 
6.7
%
 
6.2
%
 
0.5
%
 
5.6
%
 
0.6
%
Depreciation and amortization includes depreciation on capital expenditures for restaurants and corporate assets as well as amortization of acquired franchise rights, leasehold interests, and certain liquor licenses. In 2016, depreciation and amortization increased $9.3 million or 12.0% compared to 2015, primarily related to new restaurants opened and acquired since 2015, restaurants remodeled under our brand transformation initiative since 2015, and accelerated depreciation of certain software and restaurant assets. We project our depreciation and amortization expense to be slightly less than $95 million in 2017.
In 2015, depreciation and amortization increased $12.8 million or 19.8% compared to 2014 primarily related to new restaurants opened and acquired, restaurants remodeled under our brand transformation initiative since 2014, and new technology put into service. The increase was partially offset by a $1.0 million decrease in depreciation related to a change in accounting estimate related to certain asset lives in 2015.
Selling, General, and Administrative
(In thousands, except percentages)
 
2016
 
2015
 
2016 - 2015 Percent Change
 
2014
 
2015 - 2014 Percent Change
Selling, general, and administrative
 
$
136,859

 
$
143,079

 
(4.3
)%
 
$
132,158

 
8.3
 %
As a percent of total revenues
 
10.5
%
 
11.4
%
 
(0.9
)%
 
11.5
%
 
(0.1
)%
Selling, general, and administrative costs include all corporate and administrative functions. Components of this category include corporate, regional, and franchise support salaries and benefits; marketing and advertising costs; travel; legal expenses; professional and consulting fees; corporate information systems; office rent; training; and board of directors’ expenses.
Selling, general, and administrative costs in 2016 decreased $6.2 million or 4.3% as compared to 2015. The decrease was primarily due to a decrease in incentive compensation, travel and entertainment, and professional services costs, partially offset by higher litigation contingencies and salaries.
Selling, general, and administrative costs in 2015 increased $10.9 million or 8.3% as compared to 2014. The increase was driven primarily by an increase in compensation expense, including stock-based and incentive-related compensation; increased marketing spending including gift card related costs; and increased training and hiring costs.

28


Pre-opening and Acquisition Costs
(In thousands, except percentages and restaurant openings)
 
2016
 
2015
 
2016 - 2015 Percent Change
 
2014
 
2015 - 2014 Percent Change
Pre-opening and acquisition costs(1)(2)
 
$
8,025

 
$
7,008

 
14.5
 %
 
$
8,264

 
(15.2
)%
As a percent of total revenues
 
0.6
%
 
0.6
%
 
 %
 
0.7
%
 
(0.1
)%
Number of restaurants opened during year
 
26

 
24

 
8.3
 %
 
22

 
9.1
 %
Average per restaurant pre-opening costs
 
$
281

 
$
292

 
(3.8
)%
 
$
295

 
(1.0
)%
___________________________________
(1)
Acquisition costs in 2016 related to the acquisition of 13 Red Robin franchised restaurants in the United States totaled $0.7 million.
(2)
Acquisition costs in 2014 related to the acquisition of 36 Red Robin franchised restaurants in the United States and Canada and totaled $1.8 million.
Pre-opening costs, which are expensed as incurred, consist of the costs of labor, hiring, and training the initial work force for our new restaurants; occupancy costs incurred prior to opening; travel expenses for our training teams; licenses and marketing; the cost of food and beverages used in training; supply costs; and other direct costs related to the opening of new restaurants. Average per restaurant pre-opening costs represents total costs incurred for those restaurants that opened for business during the periods presented, including Red Robin Burger Works restaurants.
Asset Impairment and Restaurant Closure Costs
During 2016, we determined that 19 Company-owned restaurants were impaired. We recognized a non-cash impairment charge of $24.4 million as a result of the current and projected future results of these restaurants. During 2015, we determined that two Company-owned restaurants were impaired and recognized a non-cash impairment charge of $0.6 million. During 2014, we determined that three Company-owned restaurants were impaired and recognized a non-cash impairment charge of $1.2 million. The Company reviewed each restaurant’s past and present operating performance combined with projected future results, primarily through projected undiscounted cash flows, which indicated impairment. The carrying amount of each restaurant was compared to its estimated fair value as determined by management. The impairment charge represents the excess of each restaurant’s carrying amount over its estimated fair value. The fair value measurement for asset impairment is based on significant inputs not observed in the market and thus represents a level 3 fair value measurement.
The Company also recognized a $0.8 million asset impairment charge due to the relocation of a restaurant during 2016. No impairments were recorded in 2015 or 2014 related to the relocation of restaurants.
During the fourth quarter of 2016, the Company determined certain software related to its Enterprise Resource Planning (“ERP”) system would be obsolete upon migration to a cloud-based ERP system in 2017. The Company also determined certain software in development for supply chain management would not meet the Company’s requirements if it were implemented. As a result, the Company recorded a $2.5 million impairment charge to write down the capitalized costs associated with this software.
No impairments related to software in development or use were recorded in 2015. During the fourth quarter of 2014, the Company determined that certain software in development related to the supply chain and human resource management system modules of its ERP system would not meet the Company’s requirements if they were implemented. As the result, the Company recorded a $7.6 million impairment charge to write down the capitalized costs associated with the supply chain and human resource management system modules.
During 2016, the Company closed nine Red Robin Burger Works restaurants, a smaller non-traditional prototype with a limited menu and limited service, that were underperforming relative to Company expectations and recognized $6.7 million of restaurant closure costs. The Company recorded immaterial restaurant closure expenses in 2015 and 2014. Refer to Note 4, Asset Impairment and Restaurant Closure Costs.
Interest Expense
Interest expense in 2016, 2015, and 2014 was $7.2 million, $3.7 million, and $3.0 million. Interest expense increased in 2016 due to a higher average debt balance partially offset by a lower weighted average interest rate of 2.4% versus 2.6% in 2015. Interest expense increased in 2015 due to a higher average debt balance partially offset by a lower weighted average interest rate of of 2.6% versus 2.8% in 2014. Interest expense is expected to be between $7 million and $8 million in 2017.
(Benefit) Provision for Income Taxes
The benefit from income taxes was $6.9 million in 2016 compared to a provision for income taxes of $15.5 million in 2015 and a provision for income taxes of $9.3 million in 2014. Our effective income tax rate was 144.9% benefit in 2016, 24.6% expense in 2015, and 22.2% expense in 2014. The change in our 2016 effective tax rate is primarily attributable to a decrease in earnings before income tax as well as an increase in the FICA tip tax credit. The increase in our 2015 effective tax rate compared to 2014 was primarily attributable to an increase in earnings before income tax, partially offset by an increase in the FICA tip tax credit. The 2017 annual tax rate is projected to be between 20% and 22%.
Liquidity and Capital Resources
General
Cash and cash equivalents decreased $11.0 million to $11.7 million at December 25, 2016, from $22.7 million at December 27, 2015. This decrease in our cash position was primarily the net result of:
$99.0 million of cash provided by operating activities;
$132.9 million additional net borrowings from our credit facility and payments on capital leases;

29


$203.7 million used for the construction of new restaurants, expenditures for facility improvements, acquisition of franchised restaurants, and investments in information technology;
$46.1 million used for the repurchase of the Company’s common stock; and
$3.6 million in proceeds and the related tax benefit from stock option exercises and purchases of common stock through the employee stock purchase plan.
We expect to continue to reinvest available cash flows from operations to develop new restaurants or invest in existing restaurants and infrastructure; pay down debt; opportunistically repurchase our common stock; purchase franchised restaurants; and execute our long-term strategic initiatives.
In 2014, we acquired 18 Red Robin franchised restaurants in Canada and we intend to reinvest earnings from these restaurants in our Canadian subsidiaries for the foreseeable future. We have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs and, accordingly, we do not provide for U.S. federal income and foreign withholding tax on these earnings.
Cash Flows
The table below summarizes our cash flows from operating, investing, and financing activities for each of the past three fiscal years (in thousands):
 
 
2016
 
2015
 
2014
Net cash provided by operating activities
 
$
98,957

 
$
140,923

 
$
123,581

Net cash used in investing activities
 
(199,379
)
 
(169,111
)
 
(155,278
)
Net cash provided by financing activities
 
89,333

 
28,767

 
37,051

Effect of exchange rate changes on cash and cash equivalents
 
116

 
(282
)
 
(54
)
Net (decrease) increase in cash and cash equivalents
 
$
(10,973
)
 
$
297

 
$
5,300

Operating Cash Flows
Net cash provided by operating activities decreased $41.9 million to $99.0 million in 2016 as compared to $140.9 million in 2015. The decrease was primarily driven by $24.0 million in additional payments to vendors, a $15.4 million decrease in cash generated from restaurant operations, a $4.7 million increase in team member salaries and benefits, a $3.0 million increase in interest payments, $2.7 million paid for restaurant closure costs, and a $1.8 million increase in compensation payments related to prior year’s bonus payout, partially offset by a $9.7 million decrease in income tax payments.
Net cash provided by operating activities increased $17.3 million to $140.9 million in 2015 as compared to $123.6 million in 2014. The increase was primarily driven by a $35.8 million increase from restaurant operations including $15.7 million from newly opened and acquired restaurants, offset by $5.0 million in additional payments to vendors, $2.9 million additional tax and interest payments, a $2.9 million increase marketing spend (including gift card related costs), a $2.0 million decrease in tenant incentive payments received, a $1.9 million increase in compensation payments, and $1.6 million of additional training related costs.
Investing Cash Flows
Net cash flows used in investing activities increased $30.3 million from $169.1 million in 2015 to $199.4 million in 2016. The increase over prior year is primarily due to the acquisition of franchised restaurants and increased investment in new restaurant openings, partially offset by decreased investments in restaurant remodels. The following table lists the components of our capital expenditures, net of currency translation effect, for 2016 (in thousands):

Year Ended December 25, 2016
New restaurants
$
63,177

Restaurant remodels
55,561

Acquisition of franchised restaurants
39,966

Investment in technology infrastructure and other
25,582

Restaurant maintenance capital
19,447

Total capital expenditures
$
203,733


30


Net cash flows used in investing activities increased $13.8 million from $155.3 million in 2014 to $169.1 million in 2015. The increase over prior year was primarily due to the increased investments in restaurant remodels and technology infrastructure, partially offset a decrease in acquisitions and new restaurant openings.
In 2017, capital expenditures are expected to be between $85 million and $95 million, primarily related to the construction of new restaurants.
Financing Cash Flows
Cash provided by our financing activities increased $60.6 million to $89.3 million in 2016. This increase was primarily due to a $69.9 million increase in net debt borrowings, partially offset by a $6.1 million increase in cash used to repurchase the Company’s common stock, a $2.5 million decrease in net cash proceeds received from exercise of employee stock options and purchase plan and tax benefit from exercise of stock options, and a $0.7 million increase in debt issuance costs.
Cash provided by our financing activities decreased $8.3 million to $28.8 million in 2015. This increase was primarily due to a $13.1 million increase in cash used to repurchase the Company’s common stock, partially offset by a $3.8 million increase in net debt borrowings and a $0.9 million increase in net cash proceeds received from exercise of employee stock options and purchase plan.
Credit Facility.    On June 30, 2016, we replaced the credit facility that we entered into in 2014 with a new credit facility (the “New Credit Facility”) with the same group of lenders. The New Credit Facility provided for a $400 million revolving line of credit with a sublimit for the issuance of up to $25 million in letters of credit and swingline loans up to $15 million, and includes an option to increase the amount available under the credit facility up to an additional $100 million in the aggregate, subject to the lenders’ participation.
The New Credit Facility also provides a Canadian Dollar borrowing sublimit equivalent to $20 million. Borrowings under the New Credit Facility, if denominated in U.S. Dollars, are subject to rates based on the London Interbank Offered Rate (“LIBOR”) plus a spread based on leverage or a base rate plus a spread based on leverage (base rate is the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus .50% and (c) LIBOR for an Interest Period of one month plus 1%). Borrowings under the New Credit Facility, if denominated in Canadian Dollars, are subject to rates based on LIBOR plus a spread based on leverage or a base rate plus a spread based on leverage (base rate is the highest of (a) the Canadian Prime Rate and (b) the Canadian Dealer Offered Rate (“CDOR Rate”) for an interest period of one month plus 1%).
The New Credit Facility matures on June 30, 2021. Borrowings under the New Credit Facility are secured by first priority liens and security interests in substantially all of the Company’s assets, including the capital stock of certain Company subsidiaries, and are available for financing activities including restaurant construction costs, working capital and general corporate purposes, including, among other uses, to refinance certain indebtedness, permitted acquisitions, and redemption of capital stock. As of December 25, 2016, the Company had outstanding borrowings under the New Credit Facility of $335.5 million, in addition to amounts issued under letters of credit of $8.8 million, which reduced the amount available under the New Credit Facility but are not recorded as debt.
Covenants.    We are subject to a number of customary covenants under the New Credit Facility, including limitations on additional borrowings, acquisitions, capital expenditures, stock repurchases, lease commitments, and dividend payments. We are also required to maintain two financial ratios. First, we are required to maintain a lease adjusted leverage ratio below 4.75x EBITDAR. Secondly, we are required to maintain a fixed charge coverage ratio minimum of 1.25x our fixed charges. As of December 25, 2016, our lease adjusted leverage ratio was 4.35x and our fixed charge coverage ratio was 2.11x. The lease adjusted leverage ratio, fixed charge coverage ratio, EBITDAR, and fixed charges are defined in Section 1.1 of the Credit Agreement for our New Credit Facility, which is filed as Exhibit 10.32 of this Annual Report on Form 10-K.
If we were to experience continuing declines in comparable sales or deterioration in operating cash flows, it could impact our ability to comply with our debt covenant financial ratios, which could accelerate repayment of and impact availability to borrow under the New Credit Facility. In the event this were to occur, we would pursue an amendment of the New Credit Facility with our lenders.
Debt Outstanding.    Total debt and capital lease obligations outstanding increased $137.0 million to $347.8 million at December 25, 2016 from $210.8 million at December 27, 2015, primarily due to the additional borrowings in 2016 to fund restaurant remodels to the Company’s new brand standards and construction of new restaurants, and together with cash flow from operations, to fund the repurchase of $46.1 million of our common stock.

31


Stock Repurchase.    On February 11, 2016, the Company’s board of directors re-authorized the Company’s share repurchase program and approved the repurchase of up to $100 million of the Company’s common stock. The share repurchase authorization became effective on February 11, 2016, and will terminate upon completing the repurchase of $100 million of common stock unless otherwise terminated by the board. Purchases under the repurchase program may be made in open market or privately negotiated transactions. Purchases may be made from time to time at the Company’s discretion and the timing and amount of any share repurchases will be determined based on share price, market conditions, legal requirements and other factors. The repurchase program does not obligate the Company to acquire any particular amount of common stock, and it may be suspended or discontinued at any time.
In 2016, we repurchased 940,034 shares with an average purchase price of $49.02 per share for a total of $46.1 million. In 2015, we repurchased 556,049 shares with an average purchase price of $71.93 per share for a total of $40.0 million. In 2014, we repurchased 463,780 shares with an average purchase price of $57.97 per share for a total of $26.9 million.
Contractual Obligations.    The following table summarizes the amounts of payments due under specified contractual obligations as of December 25, 2016 (in thousands):
 
 
Payments Due by Period
 
 
Total
 
2017
 
2018 - 2019
 
2020 - 2021
 
2022 and
Thereafter
Long-term debt obligations(1)
 
$
375,631

 
$
13,219

 
$
17,403

 
$
344,069

 
$
940

Capital lease obligations(2)
 
15,620

 
1,183

 
2,366

 
2,436

 
9,635

Operating lease obligations(3)
 
558,331

 
73,496

 
136,800

 
115,982

 
232,053

Purchase obligations(4)
 
142,588

 
101,265

 
28,954

 
12,369

 

Other non-current liabilities(5)
 
9,334

 
1,341

 
1,655

 
1,499

 
4,839

Total contractual obligations
 
$
1,101,504

 
$
190,504

 
$
187,178

 
$
476,355

 
$
247,467

___________________________________
(1)
Long-term debt obligations primarily represent minimum required principal payments under our credit agreement including estimated interest of $39.0 million based on a 2.65% average borrowing interest rate.
(2)
Capital lease obligations include interest of $4.2 million.
(3)
Operating lease obligations represent future minimum lease commitments payable for land, buildings, and equipment used in our operations. This table excludes contingent rents, including amounts which are determined as a percentage of adjusted sales in excess of specified levels.
(4)
Purchase obligations include commitments for the construction of new restaurants and other capital improvement projects and lease commitments for Company-owned restaurants where leases have been executed but construction has not begun. It also includes the Company’s share of system-wide commitments for beverage and supply items. These amounts require estimates and could vary due to the timing of volumes. Excluded are any agreements that are cancelable without significant penalty.
(5)
Other non-current liabilities primarily represent employee deferred compensation plan liability. Refer to Note 17, Employee Benefit Programs, of Notes to Consolidated Financial Statements of this report for additional information.
Financial Condition and Future Liquidity.    We require capital principally to grow the business through new restaurant construction, as well as to maintain, improve and refurbish existing restaurants, support for infrastructure needs, and for general operating purposes. In addition, we have and may continue to use capital to pay principal on our borrowings and repurchase our common stock. Our primary short-term and long-term sources of liquidity are expected to be cash flows from operations and our revolving credit facility. Based upon current levels of operations and anticipated growth, we expect that cash flows from operations will be sufficient to meet debt service, capital expenditures, and working capital requirements for at least the next twelve months. We and the restaurant industry in general maintain relatively low levels of accounts receivable and inventories, and vendors generally grant short-term trade credit for purchases, such as food and supplies. We also continually invest in our business through the addition of new restaurants and refurbishment of existing restaurants, which are reflected as long-term assets and not as part of 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

32


expenditures, debt repayment, or to repurchase stock. When necessary, we utilize our revolving credit facility to satisfy short-term liquidity requirements. However, we believe that our future cash flows will be sufficient to satisfy any working capital deficits.
Inflation
The primary inflationary factors affecting our operations are food, labor costs, energy costs, and materials used in the construction of new restaurants. A large number of our restaurant personnel are paid at rates based on the applicable minimum wage, and increases in the minimum wage have directly affected our labor costs in recent years. Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases. We believe food cost deflation had a positive impact on our financial condition and results of operations during 2016, due primarily to ground beef. Food cost deflation was partially offset by a negative impact of inflation on labor costs in 2016. We believe inflation had a negative impact on our financial condition and results of operations in 2014 and 2015 due primarily to higher wages, costs for certain supplies, and commodity prices for certain foods we purchased at market rates. Uncertainties related to fluctuations in costs, including energy costs, commodity prices, annual indexed wage increases, and construction materials make it difficult to predict what impact, if any, inflation may have on our business during 2017, but it is anticipated that inflation will continue to have a negative impact on labor costs in fiscal year 2017.
Seasonality
Our business is subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the summer months and winter holiday season. As a result, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly as a result of seasonality. 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, and comparable restaurant sales for any particular future period may fluctuate.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that 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 that we believe to be appropriate under the circumstances. Actual results may differ from these estimates, including our estimates of future restaurant level cash flows, which are subject to the current economic environment, and we might obtain different results if we used different assumptions or conditions. We have identified the following as the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results and require management’s most subjective and complex judgment. Information regarding the Company’s other significant accounting policies is disclosed in Note 1, Description of Business and Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
Impairment of Long-Lived Assets.    Long-lived assets, including restaurant sites, leasehold improvements, and other fixed assets, and amortizable intangible assets are reviewed when indicators of impairment are present. Expected cash flows associated with an asset are the key factor in determining the recoverability of the asset. Identifiable cash flows are measured at the restaurant level. The estimate of cash flows is based upon, among other things, certain assumptions about expected future operating performance, including assumptions on future revenue trends. Management’s estimates of undiscounted cash flows may differ from actual cash flows due to, among other things, changes in economic conditions, changes to our business model, or changes in operating performance. If the sum of the undiscounted cash flows is less than the carrying value of the asset, we recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset.
Judgments made by management related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause us to realize a material impairment charge. Each restaurant’s past and present operating performance were reviewed combined with projected future results, primarily through projected undiscounted cash flows, which indicated possible impairment. We compared the carrying amount of each restaurant to its fair value as estimated by management. The fair value of the long-lived assets is typically determined using a discounted cash flow projection model. The discount factor is determined using external information regarding the risk-free rate of return, industry beta factors, and premium adjustments. These factors are combined with internal information such as the Company’s average cost of debt and effective tax rate to determine a weighted average cost of capital which is applied to the undiscounted cash flows. In certain cases, management uses other market information, when available, to estimate the fair value of a restaurant. The impairment charges represent the excess of each restaurant’s

33


carrying amount over its estimated fair value. During 2016, we determined that 19 Company-owned restaurants were impaired, which resulted in a non-cash impairment charge of $24.4 million. During 2015 and 2014, we impaired two and three Company-owned restaurants for non-cash charges of $0.6 million and $1.2 million.
Information technology systems, such as internal-use computer software, are reviewed and tested for recoverability if the internal-use computer software is not expected to provide substantive service potential, a significant change occurs in the extent or manner in which the software is used or is expected to be used, a significant change is made or will be made to the software program, or costs of developing or modifying internal-use software significantly exceed the amount originally expected to develop or modify the software. During 2016, the Company determined that certain software related to its ERP system was obsolete upon migration to a cloud-based ERP system. The Company also determined that certain software in development for supply chain management would not meet the Company’s requirements if it were implemented. As a result, we recorded a $2.5 million impairment charge to write down the capitalized costs associated with this software. During 2014, we determined that certain software in development related to the supply chain and human resource management modules of our ERP system would not meet the Company’s operating requirements if they were implemented. As the result, we recorded a $7.6 million impairment charge to write down the capitalized costs associated with the supply chain and human resource management system modules.
Goodwill.    Goodwill, which is not subject to amortization, is evaluated for impairment annually during the Company’s fourth fiscal quarter, or more frequently if an event occurs or circumstances change, such as material deterioration in performance or a significant number of store closures, that would indicate that impairment may exist. Goodwill is evaluated at the level of the Company’s single operating segment, which also represents the Company’s only reporting unit. When evaluating goodwill for impairment, the Company may first perform a qualitative assessment, or step zero of the impairment test, to determine whether it is more likely than not that a reporting unit is impaired. If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, we perform a quantitative assessment and calculate the estimated fair value of the reporting unit. If the carrying amount of the reporting unit exceeds the estimated fair value, an impairment charge is recorded to reduce the carrying value to the estimated fair value. Our decision to perform a qualitative impairment assessment in a given year is influenced by a number of factors, including the significance of the excess of the reporting unit’s estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments, and the date of our acquisitions.
During 2016, the Company changed its assessment date for goodwill impairment from the end of the Company’s fiscal year to the end of its third fiscal quarter. The new assessment date is preferable as it provides the Company additional time to review and complete its goodwill impairment testing prior to the year-end reporting process and results in better alignment with the Company’s long-term budgeting and forecasting process. The change in assessment date did not delay, accelerate, or avoid an impairment charge. In 2016, the Company performed a quantitative assessment and determined that goodwill was not impaired as of October 2, 2016. The Company performed a qualitative assessment as of December 27, 2015, for the 2015 annual impairment evaluation. By review of macroeconomic conditions, industry and market conditions, cost factors, overall financial performance compared with prior projections, and other relevant entity-specific events, we determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, and therefore concluded that goodwill was not impaired as of December 27, 2015.
Lease Accounting.    Under the provisions of certain of our leases, there are rent holidays and/or escalations in payments over the base lease term, as well as renewal periods. The effects of rent holidays and escalations are reflected in rent costs on a straight-line basis over the expected lease term, which includes cancelable option periods when it is deemed to be reasonably assured that we will exercise such option periods due to the fact that we would incur an economic penalty for not doing so. The lease term commences on the date when we become legally obligated for the rent payments which coincides with the time when the landlord delivers the property for us to develop and we waive contract contingencies. All rent costs recognized during construction periods are expensed immediately as pre-opening expenses.
Judgments made by management for its lease obligations include the probable term for each lease that affects the classification and accounting for a lease as capital or operating; the rent holidays and/or escalations in payments that are taken into consideration when calculating straight-line rent; incremental borrowing rates; and the term over which leasehold improvements for each restaurant facility are amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used. We have not made any changes to the nature of the assumptions used to account for leases in the past three years.
Insurance/Self-Insurance Liabilities.    The Company is self-insured for a portion of losses related to group health insurance, general liability and workers’ compensation. We maintain stop-loss coverage with third party insurers to limit our total exposure. The self-insurance liability represents an estimate of the cost of claims incurred and unpaid as of the balance

34


sheet date. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial based estimates, as well as incurred but not reported claims, and is closely monitored and adjusted when warranted by changing circumstances. Should a greater number of claims occur compared to what was estimated, or should medical costs or other claim costs increase beyond what was expected, our accrued liabilities might not be sufficient, and additional expenses may be recorded. Actual claims experience could also be more favorable than estimated, resulting in expense reductions. Unanticipated changes in our estimates may produce materially different amounts of expense than that reported historically under these programs. We have not made any significant changes to the nature of the assumptions used to account our self-insurance liabilities in the past three years.
Income Taxes.    The determination of the Company’s provision for income taxes requires management’s judgment in the use of estimates and the interpretation and application of complex tax laws. Judgment is also required in assessing the timing and amounts of deductible and taxable items. The Company establishes contingency reserves for material, known tax exposures relating to deductions, transactions and other matters involving some uncertainty as to the proper tax treatment of the item. The Company’s reserves reflect its judgment as to the resolution of the issues involved if subject to judicial review. Several years may elapse before a particular matter, for which the Company has established a reserve, is audited and finally resolved or clarified. While the Company believes that its reserves are adequate to cover reasonably expected tax risks, issues raised by a tax authority may be finally resolved at an amount different than the related reserve. Such differences could materially increase or decrease the Company’s income tax provision in the current and/or future periods. When facts and circumstances change (including a resolution of an issue or statute of limitations expiration), these reserves are adjusted through the provision for income taxes in the period of change. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, then these assets will be adjusted through the Company’s provision for income taxes in the period in which this determination is made.
Unearned Revenues.    Unearned revenues represent our liability for gift cards that have been sold but not yet redeemed, as well as deferred revenues related to our loyalty program. We recognize sales when the gift card is redeemed by the customer. Although there are no expiration dates or dormancy fees for our gift cards, based on our historical gift card redemption patterns, we can reasonably estimate the amount of gift cards for which redemption is remote, which is referred to as “breakage.” We recognize breakage within other revenue over the expected period of redemption as the remaining gift card values are redeemed. If actual redemption patterns vary from our estimates, actual gift card breakage income may differ from the amounts recorded. We update our estimate of our breakage rate periodically and apply that rate to gift card redemptions.
Under the terms of our Red Robin Royalty™ loyalty program, among other benefits, a registered member receives an award for a free entrée after the purchase of nine qualifying entrées. We recognize the current sale of an entrée and defer a portion of the revenue to reflect partial pre-payment for the future entrée the member is entitled to receive. We estimate the future value of the award based on the historical average value of redemptions. We also estimate what portion of registered members are not likely to reach the ninth purchase based on historical activity and recognize the deferred revenue related to those purchases. We recognize the deferred revenue on earned rewards when redeemed or upon expiration, which is 60 days after the award is earned. We compare the estimate of the value of future awards to historical redemptions to evaluate the reasonableness of the deferred amount.
Stock-Based Compensation. We account for stock-based compensation in accordance with fair value recognition provisions, under which we recognize stock-based compensation using the Black-Scholes or Monte Carlo (for performance-based units) option pricing model and recognize expense on a graded vesting basis over the requisite service periods of an option. Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the input of highly subjective and judgmental assumptions including volatility, forfeiture rates, and expected option life. If any of the assumptions used in the model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period. We have not made any changes to the nature of the assumptions used to account for stock-based compensation in the past three years.
Business Combinations. The Company allocates the purchase price of an acquired business to its net identifiable assets and liabilities based on the estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. The Company uses all available information to estimate fair values including the fair value determination of indefinable intangible assets such as reacquired franchise rights, and any other significant assets or liabilities. In making these determinations, the Company may use the assistance of an independent third party valuation group.
Off Balance Sheet Arrangements
Except for operating leases (primarily restaurant leases) entered into the normal course of business, we do not have any material off balance sheet arrangements.

35


Recent Accounting Pronouncements
Refer to Note 2, Recent Accounting Pronouncements, of Notes to Consolidated Financial Statements of this report.
ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Under our New Credit Facility, we are exposed to market risk from changes in interest rates on borrowings, which bear interest at one of the following rates we select: if our borrowings are denominated in U.S. Dollars, an Alternate Base Rate (“ABR”), based on the Prime Rate plus 0.0% to 1.0%, or the London Interbank Offered Rate (“LIBOR”), based on the relevant one, three, or six-month LIBOR, at our discretion, plus 1.0% to 2.0%; if our borrowings are denominated in Canadian Dollars, an ABR based on the Canadian Prime Rate plus 0.0% to 1.0%, or LIBOR, based on the relevant one, three, or six-month LIBOR, at our discretion, plus 1.0% to 2.0%. The spread, or margin, for ABR and LIBOR loans under the New Credit Facility is subject to quarterly adjustment based on our leverage ratio, as defined by the credit agreement. As of December 25, 2016, we had $335.5 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 $3.4 million on an annualized basis.
Our objective in managing exposure to interest rate changes is to limit the effect of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve this objective, we have, in the past, used an interest rate swap to fix a portion of our variable rate debt. Our last interest rate swap matured on June 30, 2015. 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. Refer to Note 9, Derivative and Other Comprehensive Income, of Notes to Consolidated Financial Statements of this report for additional information.
Foreign Currency Exchange Risk
We operate 18 restaurants in Canada and the Canadian Dollar is the functional currency for our Canadian restaurant operations. We have currency risk related to transactions denominated in Canadian Dollars and the translation of our Canadian restaurants’ financial results into U.S. Dollars.
Due to the immateriality of our Canadian restaurant operations, our foreign currency risk is limited at this date. As a result, the Company has not entered into any foreign currency exchange rate contracts to hedge against changes in foreign currency exchange rates on assets and liabilities expected to be settled at a future date. Refer to the “Risk Factors” set forth in Part II, Item 1A of this filing for more information about the market risks to which we are exposed as a result of our foreign operations.
Commodity Price Risks
Many of the food products we purchase are affected by changes in weather, production, availability, seasonality, and other factors outside our control. In an effort to mitigate some of this risk, we have entered into fixed price agreements on some of our food and beverage products, including certain proteins, produce, and cooking oil. As of December 25, 2016, approximately 60% of our estimated annual food and beverage purchases were covered by fixed price contracts, most of which are scheduled to expire at various times through the end of 2017. These contracts may exclude related expenses such as fuel surcharges and other fees. In addition, we believe that almost all of our food and supplies are available from several sources, which helps to reduce or mitigate these risks.

36


ITEM 8.    Financial Statements and Supplementary Data

RED ROBIN GOURMET BURGERS, INC.
INDEX
 
Page
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements


37


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


The Board of Directors and Stockholders of
Red Robin Gourmet Burgers, Inc.:


We have audited the accompanying consolidated balance sheets of Red Robin Gourmet Burgers, Inc. and subsidiaries (the Company) as of December 25, 2016 and December 27, 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Red Robin Gourmet Burgers, Inc. and subsidiaries as of December 25, 2016 and December 27, 2015, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 25, 2016, based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 21, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP
Denver, Colorado
February 21, 2017


38


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Red Robin Gourmet Burgers, Inc.
Greenwood Village, Colorado

We have audited the accompanying consolidated statements of income, comprehensive income, stockholders' equity and cash flows for the year ended December 28, 2014 of Red Robin Gourmet Burgers, Inc. and subsidiaries (the “Company”). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows Red Robin Gourmet Burgers, Inc. and subsidiaries, for the year ended December 28, 2014, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
February 20, 2015


39


RED ROBIN GOURMET BURGERS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
 
 
December 25, 2016
 
December 27, 2015
Assets:
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
11,732

 
$
22,705

Accounts receivable, net
 
24,166

 
27,760

Inventories
 
29,899

 
28,223

Prepaid expenses and other current assets
 
27,049

 
18,052

Total current assets
 
92,846

 
96,740

Property and equipment, net
 
656,439

 
603,686

Goodwill
 
95,935

 
81,957

Intangible assets, net
 
42,270

 
39,573

Other assets, net
 
31,055

 
18,023

Total assets
 
$
918,545

 
$
839,979

Liabilities and Stockholders Equity:
 
 
 
 
Current Liabilities:
 
 
 
 
Trade accounts payable
 
$
13,740

 
$
23,392

Construction related payables
 
12,862

 
28,692

Accrued payroll and payroll-related liabilities
 
34,703

 
47,587

Unearned revenue
 
50,199

 
48,392

Accrued liabilities and other current liabilities
 
29,505

 
29,610

Total current liabilities
 
141,009

 
177,673

Deferred rent
 
72,431

 
66,470

Long-term debt
 
336,375

 
202,875

Long-term portion of capital lease obligations
 
10,805

 
7,441

Other non-current liabilities
 
9,872

 
11,209

Total liabilities
 
570,492

 
465,668

Stockholders Equity:
 
 
 
 
Common stock; $0.001 par value: 45,000 shares authorized; 17,851 and 17,851 shares issued; 12,828 and 13,628 shares outstanding
 
18

 
18

Preferred stock, $0.001 par value: 3,000 shares authorized; no shares issued and outstanding
 

 

Treasury stock 5,023 and 4,223 shares, at cost
 
(207,720
)
 
(167,339
)
Paid-in capital
 
208,022

 
205,995

Accumulated other comprehensive loss, net of tax
 
(5,008
)
 
(5,379
)
Retained earnings
 
352,741

 
341,016

Total stockholders equity
 
348,053

 
374,311

Total liabilities and stockholders equity
 
$
918,545

 
$
839,979

See Notes to Consolidated Financial Statements.

40


RED ROBIN GOURMET BURGERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
 
 
Year Ended
 
 
December 25, 2016
 
December 27, 2015
 
December 28, 2014
Revenues:
 
 
 
 
 
 
Restaurant revenue
 
$
1,280,669

 
$
1,238,898

 
$
1,129,135

Franchise royalties and fees
 
11,209

 
12,526

 
13,637

Other revenue
 
4,563

 
6,168

 
3,330

Total revenues
 
1,296,441

 
1,257,592

 
1,146,102

Costs and expenses:
 
 
 
 
 
 
Restaurant operating costs (excluding depreciation and amortization shown separately below):
 
 
 
 
 
 
Cost of sales
 
298,249

 
304,637

 
287,221

Labor (includes $181, $115, and $81 of stock-based compensation)
 
439,232

 
403,517

 
372,657

Other operating
 
173,977

 
154,344

 
140,972

Occupancy
 
107,408

 
100,007

 
86,734

Depreciation and amortization
 
86,695

 
77,374

 
64,579

Selling, general, and administrative expenses (includes $4,364, $4,609, and $4,089 of stock-based compensation)
 
136,859

 
143,079

 
132,158

Pre-opening and acquisition costs
 
8,025

 
7,008

 
8,264

Asset impairment and restaurant closure costs
 
34,426

 
581

 
8,833

Total costs and expenses
 
1,284,871

 
1,190,547

 
1,101,418

Income from operations
 
11,570

 
67,045

 
44,684

Other (income) expense:
 
 
 
 
 
 
Interest expense
 
7,239

 
3,680

 
3,045

Interest (income) and other, net
 
(457
)
 
129

 
(220
)
Total other expenses
 
6,782

 
3,809

 
2,825

Income before income taxes
 
4,788

 
63,236

 
41,859

(Benefit) provision for income taxes
 
(6,937
)
 
15,532

 
9,298

Net income
 
$
11,725

 
$
47,704

 
$
32,561

Earnings per share:
 
 
 
 
 
 
Basic
 
$
0.88

 
$
3.40

 
$
2.29

Diluted
 
$
0.87

 
$
3.36

 
$
2.25

Weighted average shares outstanding:
 
 
 
 
 
 
Basic
 
13,332

 
14,042

 
14,237

Diluted
 
13,462

 
14,216

 
14,447

See Notes to Consolidated Financial Statements.

41


RED ROBIN GOURMET BURGERS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
 
Year Ended
 
 
December 25, 2016
 
December 27, 2015
 
December 28, 2014
Net income
 
$
11,725

 
$
47,704

 
$
32,561

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
Changes in derivative instruments:
 
 
 
 
 
 
Net change in fair value of interest rate swap
 

 
(3
)
 
(94
)
Net loss reclassified into interest expense
 

 
36

 
95

Tax expense
 

 
(13
)
 

Net changes in derivative instruments
 

 
20

 
1

Foreign currency translation adjustment
 
371

 
(3,475
)
 
(1,900
)
Other comprehensive income (loss), net of tax
 
371

 
(3,455
)
 
(1,899
)
Total comprehensive income
 
$
12,096

 
$
44,249

 
$
30,662

See Notes to Consolidated Financial Statements.

42


RED ROBIN GOURMET BURGERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands)
 
 
Common Stock
 
Treasury Stock
 
 
 
Accumulated
Other
Comprehensive
Loss,
net of tax
 
 
 
 
 
 
Paid-in
Capital
 
 
Retained
Earnings
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
Total
Balance, December 29, 2013
 
17,851

 
$
18

 
3,501

 
$
(110,486
)
 
$
197,145

 
$
(25
)
 
$
260,751

 
$
347,403

Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan
 

 

 
(157
)
 
5,118

 
(3,049
)
 

 

 
2,069

Excess tax benefit from exercise of stock options
 

 

 

 

 
2,224

 

 

 
2,224

Acquisition of treasury stock
 

 

 
464

 
(26,884
)
 

 

 

 
(26,884
)
Non-cash stock compensation
 

 

 

 

 
4,297

 

 

 
4,297

Net Income
 
 
 
 
 
 
 
 
 
 
 
 
 
32,561

 
32,561

Other comprehensive loss
 

 

 

 

 

 
(1,899
)
 

 
(1,899
)
Balance, December 28, 2014
 
17,851

 
18

 
3,808

 
(132,252
)
 
200,617

 
(1,924
)
 
293,312

 
359,771

Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan
 

 

 
(141
)
 
4,922

 
(1,515
)
 

 

 
3,407

Excess tax benefit from exercise of stock options
 

 

 

 

 
1,980

 

 

 
1,980

Acquisition of treasury stock
 

 

 
556

 
(40,009
)
 

 
 

 
 

 
(40,009
)
Non-cash stock compensation
 

 

 

 

 
4,913

 

 

 
4,913

Net income
 

 

 

 

 

 

 
47,704

 
47,704

Other comprehensive loss
 

 

 

 

 

 
(3,455
)
 

 
(3,455
)
Balance, December 27, 2015
 
17,851

 
18

 
4,223

 
(167,339
)
 
205,995

 
(5,379
)
 
341,016

 
374,311

Exercise of options, issuance of restricted stock, shares exchanged for exercise and tax, and stock issued through employee stock purchase plan
 

 

 
(140
)
 
5,697

 
(3,001
)
 

 

 
2,696

Excess tax benefit from exercise of stock options
 

 

 

 

 
411

 

 

 
411

Acquisition of treasury stock
 

 

 
940

 
(46,078
)
 

 

 

 
(46,078
)