| RED ROBIN GOURMET BURGERS INC 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 deciding to invest in our common stock |
| The occurrence of any of the following risks could materially harm our business, financial condition, results of operations or cash flows |
| In any such case, the trading price of our common stock could decline, and you could lose all or part of your investment |
| When determining whether to invest in 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 ability to open and operate new restaurants in order to expand our restaurant base is subject to factors beyond our control |
| Our growth strategy 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 could materially and adversely affect our planned growth |
| The success of our planned expansion will depend upon numerous factors, many of which are beyond our control, including the following: · timely development of new restaurants; · our ability to identify, and secure an adequate supply of available and suitable restaurant sites; · competition for restaurant sites; · negotiation of favorable lease and construction terms; · availability and retention of qualified operating personnel, especially managers; · the availability of construction materials and labor; · management of construction and development costs of new restaurants; · securing required governmental approvals and permits in a timely manner, or at all; · cost and availability of capital; · competition in our markets and general economic conditions that may influence consumer spending or choice |
| Our focus on restaurant expansion primarily through further penetrating existing markets, could cause sales in some of our existing restaurants to decline |
| Our areas of highest concentration are Arizona, California, Colorado, Ohio, Oregon, Virginia and Washington |
| In accordance with our expansion strategy, we intend to open approximately 40prca of our new restaurants in 2006 in our existing markets |
| Because we typically draw guests from a relatively small radius around each of our restaurants, the sales performance and guest counts for restaurants near the area in which a new restaurant opens may decline due to the opening of new restaurants |
| Our expansion into new markets may present increased risks due to our unfamiliarity with the area |
| Some of our new restaurants will be located in areas where we have little or no meaningful experience and where there is the lack of market awareness of the Red Robin® brand |
| Those markets may have competitive conditions, consumer tastes and discretionary spending patterns that are different from our 12 ______________________________________________________________________ existing markets, which may cause our new restaurants to be less successful than restaurants in our existing markets |
| New restaurants, once opened, may not be profitable, if at all, for several months |
| We anticipate that our new restaurants will generally take several months to reach normalized operating levels due to inefficiencies typically associated with new restaurants, including lack of market awareness, the need to hire and train a sufficient number of team members, operating costs, which are often materially greater during the first several months of operation than thereafter, pre-opening costs and other factors |
| Further, some, or all of our new restaurants may not attain anticipated operating results or results similar to those of our existing restaurants |
| We have experienced delays in opening some of our restaurants and may experience delays in the future |
| In addition, restaurants opened in new markets may open at lower average weekly sales volumes than restaurants opened in existing markets, and may have higher restaurant-level operating expense ratios than in existing markets |
| Sales at restaurants opened in new markets may take longer to reach average annual company-owned restaurant sales, if at all, thereby affecting the profitability of these restaurants |
| Our existing systems and procedures may be inadequate to support our growth plans |
| We face the risk that our existing systems and procedures, restaurant management systems, financial controls, information and accounting systems, management resources and human resources will be inadequate to support our planned expansion of company-owned and franchised restaurants |
| Our expansion may strain our infrastructure and other resources, which could slow our restaurant development or cause other problems |
| We may not be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on our infrastructure and other resources |
| Any failure by us to continue to improve our infrastructure or to manage other factors necessary for us to achieve our expansion objectives could have a material adverse effect on our operating results |
| The acquisition of existing restaurants from our franchisees may have unanticipated consequences that could harm our business and financial condition |
| We may seek to selectively acquire existing restaurants from our franchisees who are seeking an exit strategy |
| To do so, we would need to identify suitable acquisition candidates, negotiate acceptable acquisition terms and obtain appropriate financing |
| Any acquisition that we pursue, whether or not successfully completed, may involve risks, including: · material adverse effects on our operating results, particularly in the fiscal quarters immediately following the acquisition as we integrate the franchisee’s operations into our operations; · risks associated with entering into markets or conducting operations where we have no or limited prior experience; and · the diversion of management’s attention from other business concerns |
| Future acquisitions of existing restaurants from our franchisees, which may be accomplished through a cash purchase transaction or the issuance of our equity securities, or a combination of both, could result in potentially dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and impairment charges related to goodwill and other intangible assets, any of which could harm our business, results of operations and financial condition |
| 13 ______________________________________________________________________ Our ability to utilize our revolving credit agreement and our ability to raise capital in the future may be limited, which could adversely impact our business |
| Our revolving credit agreement contains a number of restrictive covenants that limit our ability to, among other things, engage in mergers, acquisitions, joint ventures and sale-leaseback transactions, and to sell assets, incur indebtedness, make investments, create liens and pay dividends |
| Our revolving credit agreement also requires us to maintain compliance with specified financial ratios and tests |
| These restrictions could affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise |
| Changes in our operating plans, acceleration of our expansion plans, franchise acquisition opportunities, lower than anticipated sales, increased expenses or other events, including those described in this section, may cause us to seek additional debt or equity financing on an accelerated basis |
| Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could negatively impact our growth and other plans as well as our financial condition and results of operations |
| Any additional equity financing may be dilutive to the holders of our common stock |
| Additional debt financing, if available, may involve significant cash payment obligations and covenants and/or financial ratios that restrict our ability to operate our business |
| Approximately 63prca of our company-owned restaurants are located in the Western United States and, as a result, we are sensitive to economic and other trends and developments in this region |
| As of December 25, 2005, we operated a total of 102 company-owned restaurants in the Western United States, primarily in the states of Arizona, California, Colorado, Nevada, Oregon and Washington |
| As a result, we are particularly susceptible to adverse trends and economic conditions in this region, including its labor market |
| In addition, given 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 |
| Our operations are susceptible to the cost of and changes in food availability which could adversely affect our operating results |
| Our profitability depends in part on our ability to anticipate and react to changes in food costs |
| Various factors beyond our control, including adverse weather conditions, governmental regulation, production, availability, recalls of food products and seasonality may affect our food costs or cause a disruption in our supply chain |
| Chicken represented approximately 18dtta5prca and hamburger represented approximately 11dtta7prca of our food purchases in 2005 |
| We enter into annual contracts with our beef and chicken suppliers |
| Our contracts for chicken are fixed price contracts |
| Our contracts for beef are generally based on current market prices plus a processing fee |
| Changes in the price or availability of chicken or beef could materially adversely affect our profitability |
| We cannot predict whether we will be able to anticipate and react to changing food costs by adjusting our purchasing practices and menu prices, and a failure to do so could adversely affect our operating results |
| In addition, because we provide a “value-priced” product, we may not be able to pass along price increases to our guests |
| Labor shortages could slow our growth or harm our business |
| Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified, high-energy team members |
| Qualified individuals needed to fill these positions are in short supply in some areas |
| The inability to recruit and retain these individuals may delay the planned openings of new restaurants or result in high team member turnover in existing restaurants, which could harm our business |
| Additionally, competition for qualified team members could require us to pay higher wages to 14 ______________________________________________________________________ attract sufficient team members, which could result in higher labor costs |
| These team members are paid in accordance with applicable minimum wage regulations |
| Accordingly, any increase in the minimum wage, whether state or federal, could have a material adverse impact on our business |
| Price increases may impact guest visits We have announced a 1prca price increase in the first quarter of fiscal 2006 on selected menu items in order to offset increased operating expenses we believe will be recurring |
| Although we have not experienced significant consumer resistance to our past price increases, we cannot provide assurance that this or other future price increases will not deter guests from visiting our restaurants or affect their purchasing decisions |
| Our operating results may fluctuate significantly due to unexpected circumstances, increases in costs, seasonality and other factors |
| Our quarterly and annual results may fluctuate or be impacted negatively by: increases in energy costs, which may affect operating costs, costs of food, supplies and maintenance; changes in borrowings and interest rates; changes in customer discretionary spending and shopping locales; changes to accounting methods or philosophies; impairment of long-lived assets, including goodwill and losses on restaurant closures; unanticipated expenses from natural disasters and repairs to damaged or lost property |
| Moreover, our business is also subject to seasonal fluctuations |
| Historically, sales in most of our restaurants have been higher during the summer months and winter holiday season of each fiscal year |
| 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 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 |
| In the future, operating results may fall below the expectations of securities analysts and investors |
| In that event, the price of our common stock would likely decrease |
| Changes in consumer preferences or discretionary consumer spending could negatively impact our results of operations |
| Our restaurants feature burgers, salads, soups, appetizers, other entrees such as carnitas fajitas and pasta, desserts and our signature Mad Mixology® alcoholic and non-alcoholic beverages in a family-friendly atmosphere |
| Our continued success depends, in part, upon the 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 affect on our future profitability |
| 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 |
| While burger consumption in the United States has grown over the past 20 years, the demand may not continue to grow or taste trends may change |
| Our success will depend in part on our ability to anticipate and respond to changing consumer preferences, tastes and eating and purchasing habits, as well as other factors affecting the food service industry, including new market entrants and demographic changes |
| A decline in visitors to any of the regional malls, lifestyle centers, big box shopping centers and entertainment centers near the locations of our restaurants could negatively affect our restaurant sales |
| Our restaurants are primarily located near high activity 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 |
| Our success also depends to a significant extent on numerous 15 ______________________________________________________________________ factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence |
| If the number of visitors to these centers decline due to any of these factors or otherwise, our restaurant sales could decline significantly and adversely affect our results of operations |
| If our franchisees cannot develop or finance new restaurants, build them on suitable sites or open them on schedule, our growth and success may be impeded |
| Under our current form of area development agreement, franchisees must develop a predetermined number of restaurants in their area according to a schedule that lasts for the term of their development agreement |
| Franchisees may not have access to the financial or management resources that they need to open the restaurants required by their development schedules, or be able to find suitable sites on which to develop them |
| Franchisees may not be able to negotiate acceptable lease or purchase terms for the sites, obtain the necessary permits and government approvals or meet construction schedules |
| From time to time in the past, we have agreed to extend or modify development schedules for certain area developers, and we may do so in the future |
| Additionally, our franchisees depend upon financing from banks and other financial institutions in order to construct and open new restaurants |
| If any franchisee experienced difficulty in obtaining adequate financing, the lack of adequate availability of such financing could adversely affect the number and rate of new restaurant openings by our franchisees and adversely affect our future franchise revenues |
| Our franchisees could take actions that could harm our business |
| Franchisees are independent contractors and are not our employees |
| We provide training and support to franchisees; 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 |
| 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 successfully |
| If we lose the services of any of our key management personnel, our business could suffer |
| Our future success significantly depends on the continued services and performance of Dennis B Mullen, our chief executive officer; Eric Houseman, our president and chief operating officer; Katherine L Scherping, our chief financial officer and the rest of our executive team |
| Our future performance will depend on our ability to motivate and retain these and other key officers |
| Competition for these executives is intense |
| The loss of the services of members of our executive team or the inability to attract additional qualified personnel as needed could materially harm our business |
| Our senior management team has a limited history of working together |
| Our success depends, in large part, upon the services of our senior management team |
| Certain of our senior executives have been with the Company or in their present roles for less than nine months |
| These executives have limited or no previous experience with us or in those roles and there is no assurance that they will fully integrate themselves into our business or that they will manage our growth effectively |
| Our failure to assimilate these new executives, the failure of these new executives to perform effectively, or the loss of any of these new executives, could adversely affect our business, financial condition, and results of operations |
| We do not carry key person life insurance on any of our executive officers |
| 16 ______________________________________________________________________ Future changes in financial accounting standards may cause adverse unexpected operating results and affect our reported results of operations |
| Changes in accounting standards can have a significant effect on our reported results and may affect our reporting of transactions completed before the change is effective |
| As an example, in 2006, we have adopted the change that requires us to record compensation expense in the statement of operations for employee stock options using the fair value method |
| See Note 1 to our Consolidated Financial Statements for further discussion |
| New pronouncements and varying interpretations of pronouncements have occurred and may occur in the future |
| Changes to existing rules or differing interpretations with respect to our current practices may adversely affect our reported financial results |
| Our future success depends on our ability to protect our proprietary information |
| Our business prospects will depend in part on our ability to develop favorable consumer recognition of the Red Robin® name and logo |
| Although Red Robin®, America’s Gourmet Burgers & Spirits® and Mad Mixology® are federally registered trademarks with the United States Patent and Trademark Office and in Canada, our trademarks could be infringed in ways that leave us without redress, such as by imitation |
| In addition, we rely on trade secrets and proprietary know-how, and we employ various methods to protect our concepts and recipes |
| 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 |
| Moreover, we may face claims of infringement that could interfere with our use of our proprietary know-how, concepts, recipes or trade secrets |
| Defending against such claims may be costly and, if we are unsuccessful, we may be prevented from continuing to use such proprietary information in the future and/or be forced to pay damages |
| We do not maintain confidentiality and non-competition agreements with all of our executives, key personnel or suppliers |
| In the event competitors independently develop or otherwise obtain access to our know-how, concepts, recipes or trade secrets, the appeal of our restaurants could be reduced and our business could be harmed |
| We franchise our system to various franchisees |
| 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 assure that our franchisees will avoid actions that adversely affect the reputation of Red Robin or the value of our proprietary information |
| Risks related to the restaurant industry Health concerns relating to the consumption of beef, chicken or other food products could affect consumer preferences and could negatively impact our results of operations |
| Like other restaurant chains, consumer preferences could be affected by health concerns about the avian influenza, also known as bird flu, or the consumption of beef, the key ingredient in many of our menu items, or negative publicity concerning food quality, illness and injury generally, such as negative publicity concerning E coli, “mad cow” or “foot-and-mouth” disease, publication of government or industry findings concerning food products served by us, or other health concerns or operating issues stemming from one restaurant or a limited number of restaurants |
| This negative publicity may adversely affect demand for our food and could result in a decrease in guest traffic to our restaurants |
| If we react to the negative publicity by changing our concept or our menu, we may lose guests who do not prefer the new concept or menu, and may not be able to attract a sufficient new guest base to produce the revenue needed to make our restaurants profitable |
| In addition, we may have different or additional competitors for our intended guests as a result of a concept change and may not be able to compete successfully against those competitors |
| 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 |
| 17 ______________________________________________________________________ We are subject to extensive government regulation that may adversely hinder or impact our ability to govern various aspects of our business including our ability to expand and develop our restaurants |
| The restaurant industry is subject to various federal, state and local government regulations, including those relating to the sale of food and alcoholic beverages |
| While in the past we have been able to obtain and maintain the necessary governmental licenses, permits and approvals, our failure to maintain these licenses, permits and approvals, including food and liquor licenses, could adversely affect our operating results |
| Difficulties or failures in obtaining the required licenses and approvals could delay or result in our decision to cancel the opening of new restaurants |
| Local authorities may suspend or deny renewal of our food and liquor licenses if they determine that our conduct does not meet applicable standards or if there are changes in regulations |
| 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 the intoxicated person |
| A judgment substantially in excess of our insurance coverage could harm our financial condition |
| 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, workers’ compensation rates, citizenship or residency requirements, child labor regulations and sales taxes |
| Additional government-imposed increases in minimum wages, overtime pay, paid leaves of absence and mandated health benefits, such as those to be imposed by recently enacted legislation in California, increased tax reporting and tax payment requirements for team members who receive tips, or a reduction in the number of states that allow tips to be credited toward minimum wage requirements could harm our operating results |
| The federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment |
| Although our restaurants are designed to be accessible to the disabled, we could be required to make modifications to our restaurants to provide service to, or make reasonable accommodations for, disabled persons |
| We are also subject to federal and state laws that regulate the offer and sale of franchises and aspects of the licensor-licensee relationship |
| Many state franchise laws impose restrictions on the franchise agreement, including limitations on non-competition provisions and the termination or non-renewal of a franchise |
| Some states require that franchise materials be registered before franchises can be offered or sold in the state |
| 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 from guests alleging illness, injury or other food quality, health or operational concerns |
| Adverse 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 adverse publicity resulting from these sorts of allegations even if the claim actually involves one of our franchisees |
| In addition, our failure 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 requirements and sales taxes, may have a material adverse effect on our business or operations |
| The possibility of a material adverse effect on our business relating labor-related 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 labor-related issues |
| Further, employee claims against us based on, among other 18 ______________________________________________________________________ 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 |