Revenue Recognition

As described in the most recent Red Robin Gourmet Burgers 10-K, Red Robin's primary source of revenue comes from the sale of food and beverages at their company-owned restaurants. In addition to sales from company-owned restaurants, Red Robin also produces revenue from royalties and fees from franchised restaurants.

Red Robin recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a restaurant guest, franchise, or other customer.  Furthermore, Red Robin recognizes revenue from restaurant operations when payment is tendered at the point of sale, as the company's performance obligation to provide food and beverage to the customer has been satisfied. As seen from the table above, Red Robin's sources of revenue are derived from four different streams. Starting with restaurant revenue, the largest source of revenue comes from the sale of food and beverage. In 2022, 71.3% of restaurant revenue came from dine-in sales, and overall restaurant revenue increased by 8.1% from 2021 to 2022. In addition to restaurant revenue, Red Robin also has revenue streams from its franchised locations, this revenue stream increased by 12% in 2022. Franchise revenue is primarily derived from royalty income and advertising fund contributions. Gift card breakage is recognized when the likelihood of a gift card being redeemed  by the customer is remote and the company determines there is not a legal obligation to remit the unredeemed gift card balance to the relevant jurisdiction. 

Upon conducting a vertical analysis for my company, it became apparent that Red Robin struggles with a lot of different items, in particular expense items. The company has a large portion of its sales tied to cost of goods sold, reaching as high as 92% during the pandemic in 2020, and remaining at a high figure at 86% in 2022. This high value can be attributed to the company's outsourcing of materials for their food and beverage sales. In addition to cost of goods sold, another item that negatively affects Red Robin's revenues is selling, general, and administrative expense. This item contributes a consistent 11-12% of sales from 2018-2022. Lastly, to complete the full picture on Red Robin's income statement, the company has produced a negative net income over the past five years.  This figure as expressed as a percentage of sales has been (4)-(5%) in 2021 and 2022 respectively. COVID-19 pandemic was a horrific year for Red Robin with net income plummeting to -32% of sales.

Comparing Red Robin to a close competitor, Jack in the Box, illustrates the lack of efficiency in Red Robin's financial struggles in competitive subsector. JACK has a substantially lower cost of goods sold as expressed as a percentage of sales, ranging from 64-71% of total revenue. One distinction between the two companies is the interest expense, which Red Robin has outperformed it's competitor by averaging -1% interest expense as expressed as a percentage of sales, compared to JACK hovering around 5% over the past four years. Lastly, JACK has been able to produce a positive net income over the past four years, even during the pandemic, with net income ranging from 8-14%. Overall, the fundamentals of JACK are much stronger than it's competitor Red Robin.

As expressed in the table above, Red Robin has had a negative quality of earnings value over the past five years. This comes to no surprise as the company has failed to produce a positive net income over the past five years. Uncovering the origin of this negative value is crucial in understanding the financial landscape of Red Robin. Cash flow from operations has remained stagnant, peaking at $126 million in 2018, and ranging from $20-57 million in the sequential years. Ultimately, the company's consistent negative earnings quality value can be attributed to both a negative income over the past five years, along with a stagnant cash flow from operations over the past five years as well.