SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
| |
☒ | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 27, 2017
or
For the transition period from
toCommission File Number: 001-36556
EL POLLO LOCO HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| | |
Delaware | | 20-3563182 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
(714) 599-5000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | LOCO | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
| | | |
Large Accelerated Filer | ☐ | Accelerated Filer | ☒ |
| | | |
Non-accelerated Filer | ☐ | Smaller Reporting Company | ☐ |
| | | |
| | Emerging Growth Company | |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of October 23, 2017,28, 2022, there were 38,652,91837,049,182 shares of the issuer’s common stock outstanding.
Table of Contents | Page | |
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2
Item 1. Financial Statements.
EL POLLO LOCO HOLDINGS, INC.
(Amounts in thousands, except share data)
September 27, 2017 | December 28, 2016 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 7,062 | $ | 2,168 | |||
Restricted cash | — | 125 | |||||
Accounts and other receivables, net | 7,994 | 6,919 | |||||
Inventories | 2,233 | 2,112 | |||||
Prepaid expenses and other current assets | 3,016 | 3,104 | |||||
Total current assets | 20,305 | 14,428 | |||||
Property and equipment owned, net | 114,903 | 118,470 | |||||
Property held under capital leases, net | 46 | 64 | |||||
Goodwill | 248,674 | 248,674 | |||||
Trademarks | 61,888 | 61,888 | |||||
Other intangible assets, net | 403 | 484 | |||||
Deferred tax assets | 6,317 | 25,905 | |||||
Other assets | 1,136 | 1,392 | |||||
Total assets | $ | 453,672 | $ | 471,305 | |||
Liabilities and Stockholders' Equity | |||||||
Current liabilities: | |||||||
Current portion of obligations under capital leases | $ | 129 | $ | 144 | |||
Accounts payable | 10,358 | 11,637 | |||||
Accrued salaries and vacation | 9,315 | 5,754 | |||||
Accrued insurance | 5,548 | 5,444 | |||||
Accrued income taxes payable | 3 | 120 | |||||
Accrued interest | 151 | 198 | |||||
Other accrued expenses and current liabilities | 32,732 | 22,021 | |||||
Total current liabilities | 58,236 | 45,318 | |||||
Revolver loan | 85,000 | 104,000 | |||||
Obligations under capital leases, net of current portion | 219 | 317 | |||||
Deferred taxes | 3,966 | 18,488 | |||||
Other intangible liabilities, net | 843 | 1,012 | |||||
Other noncurrent liabilities | 30,739 | 36,988 | |||||
Total liabilities | 179,003 | 206,123 | |||||
Commitments and contingencies | |||||||
Stockholders' Equity | |||||||
Preferred stock, $0.01 par value, 100,000,000 shares authorized; none issued or outstanding | |||||||
Common stock, $0.01 par value—200,000,000 shares authorized; 38,652,918 and 38,473,772 shares issued and outstanding | 387 | 385 | |||||
Additional paid-in-capital | 372,671 | 371,843 | |||||
Accumulated deficit | (98,389 | ) | (107,046 | ) | |||
Total stockholders' equity | 274,669 | 265,182 | |||||
Total liabilities and stockholder’s equity | $ | 453,672 | $ | 471,305 |
| | | | | | |
|
| September 28, |
| December 29, | ||
|
| 2022 |
| 2021 | ||
Assets | | |
| | | |
Current assets: | | |
| | |
|
Cash and cash equivalents | | $ | 19,275 | | $ | 30,046 |
Accounts and other receivables, net | |
| 14,946 | |
| 13,407 |
Inventories | |
| 2,209 | |
| 2,318 |
Prepaid expenses and other current assets | |
| 2,977 | |
| 3,732 |
Income tax receivable |
| | 570 | |
| — |
Total current assets | |
| 39,977 | |
| 49,503 |
Property and equipment, net | |
| 78,107 | |
| 75,668 |
Property and equipment held under finance lease, net | |
| 1,565 | |
| 1,635 |
Property and equipment held under operating leases, net ("ROU asset") | |
| 167,985 | |
| 171,981 |
Goodwill | |
| 248,674 | |
| 248,674 |
Trademarks | |
| 61,888 | |
| 61,888 |
Deferred tax assets | |
| 1,253 | |
| 2,245 |
Other assets | |
| 2,920 | |
| 2,192 |
Total assets | | $ | 602,369 | | $ | 613,786 |
Liabilities and Stockholders’ Equity | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Current portion of obligations under finance leases | | $ | 109 | | $ | 143 |
Current portion of obligations under operating leases | |
| 20,063 | |
| 19,959 |
Accounts payable | |
| 12,486 | |
| 10,626 |
Accrued salaries and vacation | |
| 6,975 | |
| 11,539 |
Accrued insurance | |
| 11,286 | |
| 11,193 |
Accrued income taxes payable | |
| — | |
| 889 |
Current portion of income tax receivable agreement payable | |
| 417 | |
| 437 |
Other accrued expenses and current liabilities | |
| 18,930 | |
| 19,796 |
Total current liabilities | |
| 70,266 | |
| 74,582 |
Revolver loan | |
| 20,000 | |
| 40,000 |
Obligations under finance leases, net of current portion | |
| 1,653 | |
| 1,712 |
Obligations under operating leases, net of current portion | |
| 167,562 | |
| 171,651 |
Deferred taxes | |
| 6,739 | |
| 5,464 |
Income tax receivable agreement payable, net of current portion | |
| 776 | |
| 1,101 |
Other noncurrent liabilities | |
| 5,862 | |
| 8,653 |
Total liabilities | |
| 272,858 | |
| 303,163 |
Commitments and contingencies (Note 7) | |
|
| |
|
|
Stockholders’ equity | |
|
| |
|
|
Preferred stock, $0.01 par value, 100,000,000 shares authorized; none issued or outstanding | |
| — | |
| — |
Common stock, $0.01 par value, 200,000,000 shares authorized; 37,053,405 and 36,601,648 shares issued and outstanding as September 28, 2022 and December 29, 2021, respectively | |
| 370 | |
| 365 |
Additional paid-in-capital | |
| 347,079 | |
| 342,941 |
Accumulated deficit | |
| (18,128) | |
| (32,393) |
Accumulated other comprehensive income (loss) | |
| 190 | |
| (290) |
Total stockholders’ equity | |
| 329,511 | |
| 310,623 |
Total liabilities and stockholders’ equity | | $ | 602,369 | | $ | 613,786 |
See notes to condensed consolidated financial statements (unaudited).
3
EL POLLO LOCO HOLDINGS, INC.
(Amounts in thousands, except share data)
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
September 27, 2017 | September 28, 2016 | September 27, 2017 | September 28, 2016 | ||||||||||||
Revenue | |||||||||||||||
Company-operated restaurant revenue | $ | 94,982 | $ | 89,738 | $ | 287,316 | $ | 268,984 | |||||||
Franchise revenue | 6,173 | 6,078 | 19,183 | 18,660 | |||||||||||
Total revenue | 101,155 | 95,816 | 306,499 | 287,644 | |||||||||||
Cost of operations | |||||||||||||||
Food and paper cost | 27,851 | 26,960 | 84,069 | 80,760 | |||||||||||
Labor and related expenses | 27,514 | 24,455 | 80,939 | 73,323 | |||||||||||
Occupancy and other operating expenses | 22,242 | 20,071 | 64,358 | 58,401 | |||||||||||
Gain on recovery of insurance proceeds, lost profit | — | (502 | ) | — | (502 | ) | |||||||||
Company restaurant expenses | 77,607 | 70,984 | 229,366 | 211,982 | |||||||||||
General and administrative expenses | 8,285 | 8,252 | 27,594 | 25,776 | |||||||||||
Franchise expenses | 709 | 797 | 2,532 | 2,960 | |||||||||||
Depreciation and amortization | 4,697 | 4,074 | 13,646 | 11,796 | |||||||||||
Loss on disposal of assets | 65 | 58 | 724 | 524 | |||||||||||
Expenses related to fire loss | — | — | — | 48 | |||||||||||
Loss (gain) on recovery of insurance proceeds, property, equipment and expenses | — | 148 | — | (741 | ) | ||||||||||
Recovery of securities lawsuits related legal expenses | (634 | ) | — | (1,145 | ) | — | |||||||||
Asset impairment and closed-store reserves | 16,038 | 2,490 | 17,293 | 2,624 | |||||||||||
Total expenses | 106,767 | 86,803 | 290,010 | 254,969 | |||||||||||
(Loss) gain on disposition of restaurants | — | (5 | ) | — | 28 | ||||||||||
(Loss) income from operations | (5,612 | ) | 9,008 | 16,489 | 32,703 | ||||||||||
Interest expense, net of interest income of $6 and $7 for the quarters ended September 27, 2017 and September 28, 2016, respectively and $17 and $22 for year-to-date ended September 27, 2017 and September 28, 2016, respectively. | 903 | 785 | 2,471 | 2,441 | |||||||||||
Income tax receivable agreement (income) expense | (19 | ) | 182 | 107 | 411 | ||||||||||
(Loss) income before (benefit) provision for income taxes | (6,496 | ) | 8,041 | 13,911 | 29,851 | ||||||||||
(Benefit) provision for income taxes | (2,457 | ) | 2,830 | 5,254 | 11,930 | ||||||||||
Net (loss) income | $ | (4,039 | ) | $ | 5,211 | $ | 8,657 | $ | 17,921 | ||||||
Net (loss) income per share | |||||||||||||||
Basic | $ | (0.11 | ) | $ | 0.14 | $ | 0.23 | $ | 0.47 | ||||||
Diluted | $ | (0.11 | ) | $ | 0.13 | $ | 0.22 | $ | 0.46 | ||||||
Weighted-average shares used in computing net (loss) income per share | |||||||||||||||
Basic | 38,462,100 | 38,415,189 | 38,449,453 | 38,331,400 | |||||||||||
Diluted | 38,462,100 | 39,083,577 | 39,101,214 | 39,020,127 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||||||
| | September 28, 2022 | | September 29, 2021 | | September 28, 2022 | | September 29, 2021 | | ||||
Revenue |
| |
|
| |
|
| |
|
| |
|
|
Company-operated restaurant revenue | | $ | 103,174 | | $ | 99,986 | | $ | 303,585 | | $ | 301,117 | |
Franchise revenue | |
| 9,543 | |
| 8,918 | |
| 28,862 | |
| 24,919 | |
Franchise advertising fee revenue | |
| 7,161 | |
| 6,796 | |
| 21,590 | |
| 19,370 | |
Total revenue | |
| 119,878 | |
| 115,700 | |
| 354,037 | |
| 345,406 | |
Cost of operations | |
|
| |
|
| |
|
| |
|
| |
Food and paper cost | |
| 30,163 | |
| 26,698 | |
| 89,586 | |
| 78,971 | |
Labor and related expenses | |
| 33,279 | |
| 27,802 | |
| 98,966 | |
| 90,060 | |
Occupancy and other operating expenses | |
| 26,920 | |
| 25,108 | |
| 76,597 | |
| 74,288 | |
Company restaurant expenses | |
| 90,362 | |
| 79,608 | |
| 265,149 | |
| 243,319 | |
General and administrative expenses | |
| 9,855 | |
| 9,357 | |
| 29,488 | |
| 30,354 | |
Franchise expenses | |
| 9,027 | |
| 8,545 | |
| 27,315 | |
| 24,457 | |
Depreciation and amortization | |
| 3,530 | |
| 3,685 | |
| 10,745 | |
| 11,540 | |
Loss on disposal of assets | |
| 21 | |
| 83 | |
| 129 | |
| 194 | |
Loss on disposition of restaurants | | | — | | | 10 | | | — | | | 1,534 | |
Impairment and closed-store reserves | |
| 219 | |
| 167 | |
| 598 | |
| 1,091 | |
Total expenses | |
| 113,014 | |
| 101,455 | |
| 333,424 | |
| 312,489 | |
Income from operations | |
| 6,864 | |
| 14,245 | |
| 20,613 | |
| 32,917 | |
Interest expense, net | |
| 108 | |
| 449 | |
| 957 | |
| 1,399 | |
Income tax receivable agreement income | |
| (29) | |
| (19) | |
| (345) | |
| (69) | |
Income before provision for income taxes | |
| 6,785 | |
| 13,815 | |
| 20,001 | |
| 31,587 | |
Provision for income taxes | |
| 1,776 | |
| 3,654 | |
| 5,736 | |
| 8,644 | |
Net income | | $ | 5,009 | | $ | 10,161 | | $ | 14,265 | | $ | 22,943 | |
Net income per share | |
|
| |
|
| |
| | | | | |
Basic | | $ | 0.14 | | $ | 0.28 | | $ | 0.39 | | $ | 0.64 | |
Diluted | | $ | 0.14 | | $ | 0.28 | | $ | 0.39 | | $ | 0.63 | |
Weighted-average shares used in computing net income per share | |
|
| |
|
| |
|
| |
|
| |
Basic | |
| 36,402,899 | |
| 36,067,754 | |
| 36,329,938 | |
| 35,930,246 | |
Diluted | |
| 36,507,050 | |
| 36,525,424 | |
| 36,491,624 | |
| 36,457,110 | |
See notes to condensed consolidated financial statements (unaudited).
4
EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Amounts in thousands)
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||||||
| | September 28, 2022 | | September 29, 2021 | | September 28, 2022 |
| September 29, 2021 | | ||||
Net income | | $ | 5,009 | | $ | 10,161 | | $ | 14,265 | | $ | 22,943 | |
Other comprehensive income (loss) | |
|
| |
|
| |
| | |
| | |
Changes in derivative instruments | |
|
| |
|
| |
| | |
| | |
Unrealized net gains (losses) arising during the period from interest rate swap | |
| 43 | |
| (32) | |
| 974 | |
| 44 | |
Reclassifications of (gains) losses into net income | |
| (369) | |
| 133 | |
| (197) | |
| 367 | |
Income tax expense | |
| — | |
| (27) | |
| (297) | |
| (111) | |
Other comprehensive (loss) income, net of taxes | |
| (326) | |
| 74 | | | 480 | |
| 300 | |
Comprehensive income | | $ | 4,683 | | $ | 10,235 | | $ | 14,745 | | $ | 23,243 | |
See notes to condensed consolidated financial statements (unaudited).
5
EL POLLO LOCO HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(Amounts in thousands, except share data)
| | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended September 28, 2022 | |||||||||||||||
|
| |
| | |
| | |
| | |
| Accumulated |
|
| | |
|
| |
| | |
| Additional |
| | |
| Other |
| Total | |||
| | Common Stock | | Paid-in | | Accumulated | | Comprehensive | | Stockholders’ | |||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Income |
| Equity | |||||
Balance, June 29, 2022 | | 37,002,513 | | $ | 369 | | $ | 346,095 | | $ | (23,137) | | $ | 516 | | $ | 323,843 |
Stock-based compensation | | — | |
| — | |
| 1,009 | |
| — | |
| — | |
| 1,009 |
Issuance of common stock related to restricted shares | | 53,476 | | | 1 | | | (1) | | | — | | | — | | | — |
Shares repurchased for employee tax withholdings | | (2,584) | | | — | | | (24) | | | — | | | — | | | (24) |
Other comprehensive income, net of tax | | — | |
| — | |
| — | |
| — | |
| (326) | |
| (326) |
Net income | | — | |
| — | |
| — | |
| 5,009 | |
| — | |
| 5,009 |
Balance, September 28, 2022 | | 37,053,405 | | $ | 370 | | $ | 347,079 | | $ | (18,128) | | $ | 190 | | $ | 329,511 |
| | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended September 29, 2021 | |||||||||||||||
|
| |
| | |
| | |
| | |
| Accumulated |
|
| | |
|
| |
| | |
| Additional |
| | |
| Other |
| Total | |||
| | Common Stock | | Paid-in | | Accumulated | | Comprehensive | | Stockholders’ | |||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Equity | |||||
Balance, June 30, 2021 | | 36,637,761 | | $ | 367 | | $ | 341,358 | | $ | (48,732) | | $ | (607) | | | 292,386 |
Stock-based compensation | | — | |
| — | |
| 1,042 | |
| — | |
| — | |
| 1,042 |
Issuance of common stock upon exercise of stock options, net | | 41,216 | |
| — | |
| 300 | |
| — | |
| — | |
| 300 |
Shares repurchased for employee tax withholdings | | (2,446) | |
| — | |
| (45) | |
| — | |
| — | |
| (45) |
Forfeiture of common stock related to restricted shares | | (5,084) | | | (1) | | | 1 | | | — | | ��� | — | | | — |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 74 | | | 74 |
Net income | | — | |
| — | |
| — | |
| 10,161 | |
| — | |
| 10,161 |
Balance, September 29, 2021 | | 36,671,447 | | $ | 366 | | $ | 342,656 | | $ | (38,571) | | $ | (533) | | $ | 303,918 |
6
| | | | | | | | | | | | | | | | | |
| | Thirty-Nine Weeks Ended September 28, 2022 | |||||||||||||||
|
| |
| | |
| | |
| | |
| Accumulated |
|
| | |
|
| |
| | |
| Additional |
| | |
| Other |
| Total | |||
| | Common Stock | | Paid-in | | Accumulated | | Comprehensive | | Stockholders’ | |||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| (Loss) Income |
| Equity | |||||
Balance, December 29, 2021 | | 36,601,648 | | $ | 365 | | $ | 342,941 | | $ | (32,393) | | $ | (290) | | $ | 310,623 |
Stock-based compensation | | — | |
| — | |
| 2,806 | |
| — | |
| — | |
| 2,806 |
Issuance of common stock related to restricted shares | | 352,114 | | | 4 | | | (4) | | | — | | | — | | | — |
Issuance of common stock upon exercise of stock options, net | | 150,475 | | | 1 | | | 1,579 | | | — | | | — | | | 1,580 |
Shares repurchased for employee tax withholdings | | (22,901) | | | — | | | (243) | | | — | | | — | | | (243) |
Forfeiture of common stock related to restricted shares | | (27,931) | |
| — | |
| — | |
| — | |
| — | |
| — |
Other comprehensive income, net of tax | | — | |
| — | |
| — | |
| — | |
| 480 | |
| 480 |
Net income | | — | |
| — | |
| — | |
| 14,265 | |
| — | |
| 14,265 |
Balance, September 28, 2022 | | 37,053,405 | | $ | 370 | | $ | 347,079 | | $ | (18,128) | | $ | 190 | | $ | 329,511 |
| | | | | | | | | | | | | | | | | |
| | Thirty-Nine Weeks Ended September 29, 2021 | |||||||||||||||
|
| |
| | |
| | |
| | |
| Accumulated |
|
| | |
|
| |
| | |
| Additional |
| | |
| Other |
| Total | |||
| | Common Stock | | Paid-in | | Accumulated | | Comprehensive | | Stockholders’ | |||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| (Loss) Income |
| Equity | |||||
Balance, December 30, 2020 | | 36,423,505 | | $ | 364 | | $ | 339,561 | | $ | (61,514) | | $ | (833) | | $ | 277,578 |
Stock-based compensation | | — | |
| — | |
| 2,936 | |
| — | |
| — | |
| 2,936 |
Issuance of common stock related to restricted shares | | 206,098 | |
| 2 | |
| (2) | |
| — | |
| — | |
| — |
Issuance of common stock upon exercise of stock options, net | | 132,760 | |
| 1 | |
| 865 | |
| — | |
| — | |
| 866 |
Shares repurchased for employee tax withholdings | | (40,384) | |
| — | |
| (705) | |
| — | |
| — | |
| (705) |
Forfeiture of common stock related to restricted shares | | (50,532) | | | (1) | | | 1 | | | — | | | — | | | — |
Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 300 | | | 300 |
Net income | | — | |
| — | |
| — | |
| 22,943 | |
| — | |
| 22,943 |
Balance, September 29, 2021 | | 36,671,447 | | $ | 366 | | $ | 342,656 | | $ | (38,571) | | $ | (533) | | $ | 303,918 |
See notes to condensed consolidated financial statements (unaudited).
7
(Amounts in thousands)
Thirty-Nine Weeks Ended | |||||||
September 27, 2017 | September 28, 2016 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 8,657 | $ | 17,921 | |||
Adjustments to reconcile net income to net cash flows provided by operating activities: | |||||||
Depreciation and amortization | 13,646 | 11,796 | |||||
Stock-based compensation expense | 738 | 244 | |||||
Fire insurance proceeds for expenses paid and lost profit | — | 257 | |||||
Income tax receivable agreement expense | 107 | 411 | |||||
Gain on disposition of restaurants | — | (28 | ) | ||||
Loss on disposal of assets | 724 | 524 | |||||
Gain on recovery of insurance proceeds, property, equipment and expenses | — | (741 | ) | ||||
Gain on recovery of insurance proceeds, lost profits | — | (502 | ) | ||||
Impairment of property and equipment | 15,480 | 2,508 | |||||
Closed-store reserve | 1,813 | 116 | |||||
Amortization of deferred financing costs | 228 | 229 | |||||
Amortization of favorable and unfavorable leases, net | (88 | ) | (51 | ) | |||
Excess income tax benefit related to share-based compensation plans | — | (169 | ) | ||||
Deferred income taxes, net | 5,066 | 11,624 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts and other receivables, net | (1,075 | ) | (2,066 | ) | |||
Inventories | (121 | ) | 57 | ||||
Prepaid expenses and other current assets | 88 | (770 | ) | ||||
Income taxes (receivable) payable | (117 | ) | 134 | ||||
Other assets | 28 | 94 | |||||
Accounts payable | 747 | (6,269 | ) | ||||
Accrued salaries and vacation | 3,561 | 2,538 | |||||
Accrued insurance | 104 | 140 | |||||
Other accrued expenses and liabilities | 2,499 | 1,673 | |||||
Restricted cash | 125 | — | |||||
Net cash flows provided by operating activities | 52,210 | 39,670 | |||||
Cash flows from investing activities: | |||||||
Proceeds from sale of restaurant | — | 1,465 | |||||
Fire insurance proceeds for property and equipment | — | 743 | |||||
Purchase of property and equipment | (28,295 | ) | (26,465 | ) | |||
Net cash flows used in investing activities | (28,295 | ) | (24,257 | ) | |||
Cash flows from financing activities: | |||||||
Payments on revolver loan | (19,000 | ) | (16,000 | ) | |||
Proceeds from issuance of common stock upon exercise of stock options, net of expenses | 93 | 978 | |||||
Payment of obligations under capital leases | (114 | ) | (132 | ) | |||
Excess income tax benefit related to share-based compensation plans | — | 169 | |||||
Net cash flows used in financing activities | (19,021 | ) | (14,985 | ) | |||
Increase in cash and cash equivalents | 4,894 | 428 | |||||
Cash and cash equivalents, beginning of period | 2,168 | 6,101 | |||||
Cash and cash equivalents, end of period | $ | 7,062 | $ | 6,529 |
Thirty-Nine Weeks Ended | |||||||
Supplemental cash flow information | September 27, 2017 | September 28, 2016 | |||||
Cash paid during the period for interest | $ | 2,475 | $ | 2,355 | |||
Cash paid during the period for income taxes | $ | 320 | $ | 173 | |||
Unpaid purchases of property and equipment | $ | 3,131 | $ | 4,599 |
| | | | | | | |
| | | | | | | |
|
| Thirty-Nine Weeks Ended |
| ||||
|
| September 28, 2022 | | September 29, 2021 |
| ||
Cash flows from operating activities: | | |
| | |
| |
Net income | | $ | 14,265 | | $ | 22,943 | |
Adjustments to reconcile net income to net cash flows provided by provided by operating activities: | |
| | |
| | |
Depreciation and amortization | |
| 10,745 | |
| 11,540 | |
Stock-based compensation expense | |
| 2,806 | |
| 2,936 | |
Income tax receivable agreement income | |
| (345) | |
| (69) | |
Loss on disposition of restaurants | |
| — | |
| 1,534 | |
Loss on disposal of assets | |
| 129 | |
| 194 | |
Impairment of property and equipment | |
| 392 | |
| 701 | |
Amortization of deferred financing costs | |
| 292 | |
| 188 | |
Deferred income taxes, net | |
| 2,351 | |
| 2,026 | |
Changes in operating assets and liabilities: | |
| | |
| | |
Accounts and other receivables | |
| (1,539) | |
| (1,547) | |
Inventories | |
| 108 | |
| (27) | |
Prepaid expenses and other current assets | |
| 755 | |
| 825 | |
Income taxes receivable | |
| (1,459) | |
| 3,616 | |
Other assets | |
| (150) | |
| 289 | |
Accounts payable | |
| 1,285 | |
| (507) | |
Accrued salaries and vacation | |
| (4,564) | |
| (2,116) | |
Accrued insurance | |
| 93 | |
| 615 | |
Other accrued expenses and liabilities | |
| (3,257) | |
| (809) | |
Net cash flows provided by operating activities | |
| 21,907 | |
| 42,332 | |
Cash flows from investing activities: | |
| | | | | |
Proceeds from disposition of restaurants | |
| — | |
| 4,556 | |
Purchase of property and equipment | |
| (13,022) | |
| (12,699) | |
Net cash flows used in investing activities | |
| (13,022) | |
| (8,143) | |
Cash flows from financing activities: | |
|
| |
|
| |
Payments on revolver and swingline loan | |
| (20,000) | |
| (22,800) | |
Minimum tax withholdings related to net share settlements | |
| (243) | |
| (705) | |
Proceeds from issuance of common stock upon exercise of stock options, net of expenses | | | 1,580 | | | 866 | |
Payment of obligations under finance leases | |
| (124) | |
| (100) | |
Deferred financing costs for revolver loan | |
| (869) | |
| — | |
Net cash flows used in financing activities | |
| (19,656) | |
| (22,739) | |
Increase (decrease) in cash and cash equivalents | |
| (10,771) | |
| 11,450 | |
Cash and cash equivalents, beginning of period | |
| 30,046 | |
| 13,219 | |
Cash and cash equivalents, end of period | | $ | 19,275 | | $ | 24,669 | |
| | | | | | | |
| | | | | | | |
|
| Thirty-Nine Weeks Ended |
| ||||
| | September 28, 2022 | | September 29, 2021 | | ||
Supplemental cash flow information |
| |
|
| |
|
|
Cash paid during the period for interest | | $ | 819 | | $ | 828 | |
Cash paid during the period for income taxes | | $ | 5,100 | | $ | 4,088 | |
Unpaid purchases of property and equipment | | $ | 3,030 | | $ | 2,259 | |
See notes to the condensed consolidated financial statements (unaudited).
8
EL POLLO LOCO HOLDINGS, INC.
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
El Pollo Loco Holdings, Inc. (“Holdings”) is a Delaware corporation headquartered in Costa Mesa, California. Holdings and its direct and indirect subsidiaries are collectively knownreferred to herein as “we,” “us” or the “Company.” The Company'sCompany’s activities are conducted principally through its indirect wholly-owned subsidiary, El Pollo Loco, Inc. (“EPL”), which develops, franchises, licenses, and operates quick-service restaurants under the name El Pollo Loco® and operates under one operating segment. At September 27, 2017,28, 2022, the Company operated 208190 and franchised 265297 El Pollo Loco restaurants.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentationstatement of the Company'sCompany’s condensed consolidated financial position and results of operations and cash flows for the periods presented. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The condensed consolidated financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 28, 2016.
The Company uses a 52- or 53-week fiscal year ending on the last Wednesday of the calendar year. In a 52-week fiscal year, each quarter includes 13 weeks of operations; in a 53-week fiscal year, the first, second and third quarters each include 13 weeks of operations, and the fourth quarter includes 14 weeks of operations. Every six or seven years, a 53-week fiscal year occurs. Fiscal 20162022 and 20172021 are both 52-week years, ending on December 28, 20162022 and December 27, 2017,29, 2021, respectively. Revenues, expenses, and other financial and operational figures may be elevated in a 53-week year.
Holdings has no material assets or operations. Holdings and Holdings’ direct subsidiary, EPL Intermediate, Inc. (“Intermediate”), guarantee EPL’s 20142022 Revolver (see Note 4)(as defined below) on a full and unconditional basis (see Note 4, “Long-Term Debt”), and Intermediate has no subsidiaries other than EPL. EPL is a separate and distinct legal entity and has no obligation to make funds available to Intermediate. EPL and Intermediate may pay dividends to Intermediate and to Holdings, respectively.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Holdings and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and revenue and expenses during the periodperiods reported. Actual results could materially differ from those estimates. The Company’s significant estimates include estimates for
9
COVID-19
The Company may face future business disruption and related risks resulting from the ongoing COVID-19 pandemic or from another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business. During both thirteen weeks ended September 28, 2022 and September 29, 2021, respectively, the Company incurred $0.5 million in COVID-19 related expenses, primarily due to leaves of absence. During the thirty-nine weeks ended September 28, 2022 and September 29, 2021, respectively, the Company incurred $3.1 million and $3.5 million, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. While all of the Company’s restaurants had dining rooms open as of September 28, 2022, the Company continues to experience staffing challenges, including higher wage inflation, overtime costs and other labor related costs. Further, the Company continues to experience inflationary pressures, which resulted in increased commodity prices and impacted the Company’s business and results of operations during the thirteen and thirty-nine weeks ended September 28, 2022. The Company expects these pressures to continue during the remainder of fiscal 2022.
Due to the rapid development and fluidity of this situation, the Company cannot determine the ultimate direct and indirect impact that the COVID-19 pandemic and related economic effects will have on the Company’s condensed consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate materiality of the adverse impact on the Company’s condensed consolidated financial condition, liquidity, and future results of operations is uncertain.
Cash and Cash Equivalents
The Company considers all highly-liquidliquid instruments with an original maturity of three months or less at the date of purchase to be cash equivalents.
Liquidity
The Company’s principal liquidity and capital requirements are to servicenew restaurants, existing restaurant capital investments (remodels and maintenance), interest payments on its debt, lease obligations and to meetworking capital expenditureand general corporate needs. At September 27, 2017,28, 2022, the Company’s total debt (including capital lease liabilities) was $85.3$20.0 million. The Company’s ability to make payments on its indebtedness and to fund planned capital expenditures depends on available cash and on its ability to generate adequate cash flows in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond the Company’s control. Based on current operations, the Company believes that its cash flow from operations and available cash of $7.1$19.3 million at September 27, 2017, and available borrowings under the 2014 Revolver (which availability was approximately $106.9 million at September 27, 2017)28, 2022 will be adequate to meet the Company’s liquidity needs for the next 12 months.
Recently Adopted Accounting Pronouncements
None.
Subsequent Events
On October 11, 2022, the Company announced that its Board of Directors declared a special dividend of $1.50 per share on Recoverythe common stock, par value $0.01 per share, of Insurance Proceeds
In November 2015, oneaddition, on October 11, 2022, the Company announced that its Board of Directors approved a share repurchase program under which the Company is authorized to repurchase up to $20.0 million of shares of the Company’s restaurants incurred damage resulting from a fire. During the thirty-nine weeks ended SeptemberCommon Stock. The repurchase program will terminate on March 28, 2016,2024, may be modified, suspended or discontinued at any time, and does not obligate the Company incurred costs directly related to acquire any particular number of shares.
Lastly, on November 3, 2022, the fire of less than $0.1 million, disposed of an additional $0.1 million in assets, and recognized gains of $0.7 million, related to the reimbursement of property and equipment, and $0.5 million, related to the reimbursement of lost profits. The reimbursement of lost profits is included in the accompanying consolidated financial statements of operations, for the thirteen and thirty-nine weeks ended September 28, 2016, as a reduction of company restaurant expenses. The Company received from the insurance company cash of $1.0 million during the thirty-nine weeks ended September 28, 2016, and $0.4borrowed $46.0 million on October 5, 2016, netits 2022 Revolver and outstanding borrowings as of November 3, 2022 were $66.0 million. After payment of the insurance deductible. The $0.4 million is included in accounts and other receivables in the condensed consolidated balance sheet as of September 28, 2016. The restaurant was reopened for business on March 14, 2016.
10
Concentration of Risk
Cash and cash equivalents are maintained at financial institutions and, at times, these balances may exceed federally-insured limits. The Company has never experienced any losses related to these balances.
The Company had one supplier for whichto whom amounts due totaled 17.4%25.2% and 26.1% of the Company'sCompany’s accounts payable at September 27, 2017. As of28, 2022 and December 28, 2016, the Company had one supplier for which amounts due totaled 16% of the Company’s accounts payable.29, 2021, respectively. Purchases from the Company’s largest supplier totaled 27%28.4% and 28.5% of total expenses for the thirteen and thirty-nine weeks ended September 27, 2017,28, 2022 and 33%27.0% and 28.1% of total expenses for the thirteen and thirty-nine weeks ended September 28, 2016. Purchases from the Company’s largest supplier totaled 30% of total expenses for the thirty-nine weeks ended September 27, 2017, and 33% of total expenses for the thirty-nine weeks ended September 28, 2016, of the Company’s purchases. 29, 2021.
Company-operated and franchised restaurants in the greater Los Angeles area generated, in the aggregate, approximately 73%71.9% and 75%71.2% of total revenue for the thirteen and thirty-nine weeks ended September 27, 201728, 2022 and 71.6% and 70.8% for the thirteen and thirty-nine weeks ended September 28, 2016,29, 2021, respectively.
Goodwill and Indefinite Lived Intangible Assets
The Company’s indefinite livedindefinite-lived intangible assets consist of trademarks. Goodwill represents the excess of cost over fair value of net identified assets acquired in business combinations accounted for under the purchase method. The Company does not amortize its goodwill and indefinite livedindefinite-lived intangible assets. Goodwill resulted from historical acquisitions.
Upon athe sale or closure of a restaurant, the Company evaluates whether there is a decrement of goodwill. The amount of goodwill included in the cost basis of the asset sold is determined based on the relative fair value of the portion of the reporting unit disposed of compared to the fair value of the reporting unit retained.
The Company performs an annual impairment teststest for goodwill during the fourth fiscal quarter of each fiscal year, or more frequently if impairment indicators arise.
The Company reviews goodwill for impairment utilizing either a qualitative assessment or a two-step process.fair value test by comparing the fair value of a reporting unit with its carrying amount. If the Company decides that it is appropriate to perform a qualitative assessment and concludes that the fair value of a reporting unit more likely than not exceeds its carrying value, no further evaluation is necessary. If the Company performs the two-step process,fair value test, the first
The Company performs an annual impairment teststest for indefinite livedindefinite-lived intangible assets during the fourth fiscal quarter of each fiscal year, or more frequently if impairment indicators arise. An impairment test consists of either a qualitative assessment or a comparison of the fair value of an intangible asset with its carrying amount. The excess of the carrying amount of an intangible asset over its fair value is itsrecognized as an impairment loss.
The assumptions used in the estimate of fair value are generally consistent with the past performance of the Company’s reporting segment and are also consistent with the projections and assumptions that are used in current operating plans. These assumptions are subject to change as a result of changing economic and competitive conditions.
The Company did not identify anydetermined that there were no indicators of potential impairment of its goodwill and indefinite-lived intangible assets during the thirteen and thirty-nine weeks ended September 28, 2022. Accordingly, the Company did not record any impairment to its goodwill or indefinite-lived intangible assets during the thirteen and thirty-nine weeks ended September 27, 2017 or September 28, 2016, and therefore did not record any impairment during the respective periods.2022.
11
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
● | Level 1: Quoted prices for identical instruments in active markets. |
● | Level 2: Observable prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable. |
● | Level 3: Unobservable inputs used when little or no market data is available. |
During fiscal 2019, the Company had no assets or liabilitiesentered into an interest rate swap, which is required to be measured at fair value on a recurring basis.
The following table presents fair value for the interest rate swap at December 29, 2021 (in thousands):
| | | | | | | | | | | | | |
| | | | | Fair Value Measurements Using | | |||||||
|
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||
Other non-current liabilities - Interest rate swap | | $ | 396 | | $ | — | | $ | 396 | | $ | — | |
Certain assets and liabilities are measured at fair value on a nonrecurring basis. In other words, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances (for example,(e.g., when there is evidence of impairment).
The following non-financial instruments were measured at fair value, on a nonrecurring basis, as of and for the thirteen and thirty-nine weeks ended September 27, 2017 and September 28, 2016 (in thousands),2022, reflecting certain property and equipment assets and right-of-use (“ROU”) assets for which an impairment loss was recognized during the corresponding period,periods, as discussed under Note 2, “Property and Equipment” and immediately below under “Impairment of Long-Lived Assets and ROU Assets” (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Thirteen Weeks | | Thirty-Nine Weeks | ||
| | | | | Fair Value Measurements at September 28, 2022 Using | | Ended September 28, 2022 | | Ended September 28, 2022 | |||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | | Impairment Losses | | Impairment Losses | ||||||
Certain property and equipment, net | | $ | — | | $ | — | | $ | — | | $ | — |
| $ | 100 | | $ | 353 |
Certain ROU assets, net | | $ | 332 | | $ | — | | $ | — | | $ | 332 | | $ | 39 | | $ | 39 |
12
The following non-financial instruments were measured at fair value on a nonrecurring basis as of and for the thirteen and thirty-nine weeks ended September 29, 2021, reflecting certain property and equipment assets and ROU assets for which an impairment loss was recognized during the corresponding periods, as discussed immediately below under "Impairment“Impairment of Long-Lived Assets"Assets and ROU Assets” (in thousands):
Fair Value Measurements at September 27, 2017 Using | Impairment Loss | |||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Thirteen Weeks Ended September 27, 2017 | Thirty-Nine Weeks Ended September 27, 2017 | |||||||||||||||||
Property and equipment owned, net | $ | 280 | $ | — | $ | — | $ | 280 | $ | 15,035 | 15,480 |
Fair Value Measurements at September 28, 2016 Using | Impairment Loss | |||||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | Thirteen Weeks Ended September 28, 2016 | Thirty-Nine Weeks Ended September 28, 2016 | |||||||||||||||||
Property and equipment owned, net | $ | — | $ | — | $ | — | $ | — | $ | 2,508 | 2,508 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Thirteen Weeks | | Thirty-Nine Weeks | ||
| | | | | Fair Value Measurements at September 29, 2021 Using | | Ended September 29, 2021 | | Ended September 29, 2021 | |||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Impairment Losses |
| Impairment Losses | ||||||
Certain property and equipment, net | | $ | — | | $ | — | | $ | — | | $ | — |
| $ | 34 | | $ | 293 |
Certain ROU assets, net | | $ | 424 | | $ | — | | $ | — | | $ | 424 | | $ | — | | $ | 407 |
Impairment of Long-Lived Assets
The Company reviews its long-lived and ROU assets for impairment on a restaurant-by-restaurant basis whenever events or changes in circumstances indicate that the carrying value of certain long-lived and ROU assets may not be recoverable. The Company considers a triggering event related to long-lived assets or ROU assets in a net asset position to have occurred related to a specific restaurant if the restaurant’s cash flowsaverage unit volume for the last twelve months areis less than a minimum threshold or if consistent levels of undiscounted cash flows for the remaining lease period are less than the carrying value of the restaurant’s assets. Additionally, the Company considers a triggering event related to ROU assets to have occurred related to a specific lease if the location has closed or been subleased and future estimated sublease income is less than lease payments under the head lease. If the Company concludes that the carrying value of certain long-lived and ROU assets will not be recovered based on expected undiscounted future cash flows, an impairment write-downloss is recorded to reduce the long-lived or ROU assets to their estimated fair value. The fair value is measured on a nonrecurring basis using unobservable (Level 3) inputs. There is uncertainty in the projected undiscounted future cash flows used in the Company'sCompany’s impairment review analysis.analysis, which requires the use of estimates and assumptions. If actual performance does not achieve the projections, or if the assumptions used change in the future, the Company may be required to recognize impairment charges in future periods, and such charges could be material. Based on the results of the analysis,The Company determined that triggering events occurred for certain restaurants during the thirteen weeks ended September 27, 2017, the Company recorded a non-cash impairment charge of $15.0 million, primarily related to the non-recoverable assets of 10 stores in Texas and California. In addition, for the thirty-nine weeks ended September 27, 2017 the Company recorded a non-cash impairment charge of $15.5 million, primarily related to the non-recoverable assets of 11 stores, in Texas and California. For the thirteen and thirty-nine weeks ended September 28, 2016,2022 that required an impairment review of certain of the Company’s long-lived and ROU assets. Based on the results of the analysis, the Company recorded non-cash impairment charges of $0.1 million and $0.4 million for the thirteen and thirty-nine weeks ended September 28, 2022, respectively, primarily related to the long-lived assets of one restaurant in California.
The Company recorded a $2.5 million non-cash impairment charge of $0.1 million and $0.7 million for the thirteen and thirty-nine weeks ended September 29, 2021, respectively, primarily related to non-recoverablethe carrying value of the ROU assets of twoone restaurant in Texas closed in 2019, the carrying value of the ROU assets of one restaurant in California and the long-lived assets of three restaurants in Arizona and Texas. TheCalifornia. Given the inherent uncertainty in projecting results for newer restaurants in newer markets, as well as the impact of the COVID-19 pandemic, the Company continues to monitoris monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis. In particular, most of the Company’s (and its franchisees’) restaurants in Texas have been open since the beginning of 2015, and many since the beginning of 2016. Accordingly, given the difficulty in projecting results for newer restaurants in newer markets, the Company intends to continue to closely monitor the performance of its Texas portfolio. Based on the most recent results in the Texas market, if management's plans to grow sales and improve profitability are not successful, future significant impairment to the Company’s assets may occur as a result of the performance ofFor these restaurants, and the related future cash flow assumptions over the remaining lease term.
Closed-Store Reserves
When a restaurant is recognizedclosed, the Company will evaluate the ROU asset for anyimpairment, based on anticipated sublease recoveries. The remaining carrying value of certain restaurant assets.the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense. Additionally, any property tax and common area maintenance (“CAM”) payments relating to closed restaurants are included within closed-store expense. During the thirteen weeks ended September 27, 2017, the Company closed three restaurants in Texas, recognizing a closed-store reserve of $1.0 million. During the thirty-nine weeks ended September 27, 2017, the Company closed four restaurants in Texas and one in Arizona, recognizing a closed-store reserve of $1.8 million. For the thirty-nine weeks ended September 28, 2016,2022, the Company recognized less than $0.1 million and $0.2 million, respectively, of closed-store reserve expense related to adjustmentsthe amortization of ROU assets, property taxes and CAM payments for its closed locations. During the thirteen and thirty-nine weeks ended September 29, 2021, the Company recognized less than $0.1 million and $0.4 million of closed-store reserve expense, respectively, primarily related to closed-store reservesthe amortization of ROU assets, property taxes and CAM payments for its closed locations.
13
Derivative Financial Instruments
The Company used an interest rate swap, a derivative instrument, to hedge interest rate risk and not for trading purposes. The derivative contract was entered into with a financial institution. In connection with the Company’s entry into the 2022 Credit Agreement (as defined below), it terminated the interest rate swap on July 28, 2022.
The Company recorded the derivative instrument on its condensed consolidated balance sheets at fair value. The derivative instrument qualified as a hedging instrument in a qualifying cash flow hedge relationship, and the gain or loss on the derivative instrument was reported as a component of accumulated other comprehensive (loss) income (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For any derivative instruments not designated as hedging instruments, the gain or loss will be recognized in prior periods.
Income Taxes
The provision for income taxes, income taxes payable and deferred income taxes is determined using the asset and liability method. Deferred tax assets and liabilities are determined based on temporary differences between the financial carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. On a periodic basis, the Company assesses the probability that its net deferred tax assets, if any, will be recovered. If, after evaluating all of the positive and negative evidence, a conclusion is made that it is more likely than not that some portion or all of the net deferred tax assets will not be recovered, a valuation allowance is provided by charging to tax expense toa reserve for the portion of deferred tax assets which are not expected to be realized. In the first quarter of fiscal 2017 the Company implemented ASU 2015-17, "Balance Sheet Classification of Deferred Taxes," resulting in the classification of all deferred tax assets as non-current. As the Company implemented this ASU retrospectively, $21.5 million of deferred tax assets previously classified as current in fiscal year 2016 are now classified as noncurrent liabilities within the Company's consolidated balance sheets.
The Company reviews its filing positions for all open tax years in all U.S. federal and state jurisdictions where the Company is required to file.
When there are uncertainties related to potential income tax benefits, in order to qualify for recognition, the position the Company takes has to have at least a “more likely than not” chance of being sustained (based on the position’s technical merits) upon challenge by the respective authorities. The term “more likely than not” means a likelihood of more than 50 percent. Otherwise, the Company may not recognize any of the potential tax benefit associated with the position. The Company recognizes a benefit for a tax position that meets the “more likely than not” criterion at the largest amount of tax benefit that is greater than 50 percent likely of being realized upon its effective resolution. Unrecognized tax benefits involve management’s judgment regarding the likelihood of the benefit being sustained. The final resolution of uncertain tax positions could result in adjustments to recorded amounts and may affect the Company'sCompany’s condensed consolidated financial position, results of operations, and cash flows.
The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company had no accrual for interest or penalties at September 27, 201728, 2022 or at December 28, 2016, and29, 2021. The Company did not recognize interest or penalties during the thirteen orand thirty-nine weeks ended September 27, 2017 or28, 2022 and September 28, 2016,29, 2021, respectively, since there were no material unrecognized tax benefits. Management believes no materialsignificant changes to the amount of unrecognized tax benefits will occur within the next twelve months.
On July 30, 2014, the Company entered into the TRA. The TRAincome tax receivable agreement (the “TRA”), which calls for the Company to pay to its pre-IPOpre-initial public offering (“IPO”) stockholders 85% of the savings in cash that the Company realizes in its income taxes as a result of utilizing its net operating losses (“NOLs”) and other tax attributes attributable to preceding periods. For the thirteen and thirty-nine weeks ended September 27, 2017 we28, 2022, the Company recorded income tax receivable agreement income of less than $0.1 million and $0.3 million, respectively, and for both the thirteen and thirty-nine weeks ended September 28, 2016 we29, 2021, the Company recorded income tax receivable agreement expenseincome of $0.2 million, and for the thirty-nine weeks ended September 27, 2017 and September 28, 2016, we recorded income tax receivable agreement expense ofless than $0.1 million, and $0.4 million, respectively,in each case, related to the amortization of interest expense related to ourthe total expected TRA payments and changes in estimates for actual tax returns filed.filed and future forecasted taxable income.
The Coronavirus Aid, Relief and Economic Security Act provides for the deferral of employer Social Security taxes that are otherwise owed for wage payment and the creation of refundable employee retention credits. The total amount deferred as of December 30, 2020 was $4.9 million, of which 50% was paid at the end of 2021 and the remaining 50% is due by December 31, 2022.
14
The costs and related accumulated depreciation and amortization of major classes of property and equipment are as follows (in thousands):
September 27, 2017 | December 28, 2016 | ||||||
Land | $ | 12,323 | $ | 12,323 | |||
Buildings and improvements | 132,297 | 125,159 | |||||
Other property and equipment | 68,157 | 65,831 | |||||
Construction in progress | 8,470 | 11,539 | |||||
221,247 | 214,852 | ||||||
Less: accumulated depreciation and amortization | (106,344 | ) | (96,382 | ) | |||
$ | 114,903 | $ | 118,470 |
| | | | | | |
|
| September 28, 2022 |
| December 29, 2021 | ||
Land | | $ | 12,323 | | $ | 12,323 |
Buildings and improvements |
| | 152,089 |
| | 144,631 |
Other property and equipment |
| | 82,095 |
| | 78,383 |
Construction in progress |
| | 5,133 |
| | 5,333 |
|
| | 251,640 |
| | 240,670 |
Less: accumulated depreciation and amortization |
| | (173,533) |
| | (165,002) |
| | $ | 78,107 | | $ | 75,668 |
Depreciation expense was $4.7$3.5 million and $4.1$3.7 million for the thirteen weeks ended September 27, 201728, 2022 and September 28, 2016,29, 2021, respectively, and $13.6$10.7 million and $11.8$11.5 million for the thirty-nine weeks ended September 27, 201728, 2022 and September 28, 2016, respectively. For the thirteen weeks ended September 27, 2017, capital expenditures totaled $9.3 million, including $0.1 million for restaurant remodeling and $7.1 million for new restaurant expenditures. For the thirty-nine weeks ended September 27, 2017, capital expenditures totaled $28.3 million, including $2.9 million for restaurant remodeling and $21.0 million for new restaurant expenditures. For the thirteen weeks ended September 28, 2016, capital expenditures totaled $12.1 million, including $0.1 million for restaurant remodeling and $10.8 million for new restaurant expenditures. For the thirty-nine weeks ended September 28, 2016, capital expenditures totaled $26.5 million, including $1.6 million for restaurant remodeling and $20.8 million for new restaurant expenditures. Capital expenditures for these periods exclude unpaid purchases of property and equipment.
Based on the Company’s review of its long-lived assets for impairment, the Company recorded non-cash impairment charges of $15.0$0.1 million and $15.5$0.4 million for the thirteen and thirty-nine weeks ended September 27, 2017, respectively. For28, 2022, respectively, primarily related to the carrying value of the long-lived assets of one restaurant in California.
During the thirteen and thirty-nine weeks ended September 28, 2016,29, 2021, the Company recorded a $2.5 million non-cash impairment charge,charges of less than $0.1 million and $0.3 million, respectively, primarily related to non-recoverablethe carrying value of the assets of twothree restaurants in ArizonaCalifornia. See Note 1, “Basis of Presentation and Texas.
At September 27, 2017,28, 2022, options to purchase 2,302,3191,181,944 shares of common stock were outstanding, including 1,892,062659,861 vested and 410,257522,083 unvested. Unvested options vest over time. However,time; however, upon a change in control, the boardBoard of Directors may accelerate vesting. At September 27, 2017, 1,563,54928, 2022, 203,569 premium options, which are options granted above the stock price at date of grant, remained outstanding. There were noA summary of stock option exercises during the thirteen weeks endedactivity as of September 27, 201728, 2022 and 17,661 stock option exerciseschanges during the thirty-nine weeks ended September 27, 2017. For28, 2022 is as follows:
| | | | | | | | | | | |
| | | | | | | Weighted-Average |
| Aggregate | ||
|
| |
| Weighted-Average |
| Contractual Life |
| Intrinsic Value | |||
| | Shares | | Exercise Price |
| Life (Years) |
| (in thousands) | |||
Outstanding - December 29, 2021 |
| 978,078 | | $ | 11.45 | | | | | | |
Grants |
| 372,958 | |
| 10.54 | | | | | | |
Exercised |
| (150,475) | | | 10.50 | | | | | | |
Forfeited, cancelled or expired |
| (18,617) | | $ | 15.86 | | | | | | |
Outstanding - September 28, 2022 |
| 1,181,944 | | $ | 11.21 | | | 6.06 | | $ | 742 |
Vested and expected to vest at September 28, 2022 |
| 1,172,082 | | $ | 11.21 | | | 6.03 | | $ | 742 |
Exercisable at September 28, 2022 |
| 659,861 | | $ | 10.50 | | | 3.58 | | $ | 742 |
The fair value of each stock option was estimated on the thirteengrant date using an exercise price of the closing stock price on the day prior to date of grant and thirty-nine weeks endedthe Black-Scholes option-pricing model with the following weighted average assumptions:
| | | | | |
|
| September 28, 2022 |
| September 29, 2021 |
|
Expected volatility | | 43.0 | % | 46.9 | % |
Risk-free interest rate |
| 2.9 | % | 1.1 | % |
Expected term (years) |
| 6.25 |
| 6.25 | |
Expected dividends |
| — |
| — | |
15
At September 28, 2016, there were stock option exercises of 32,386 and 147,726 shares, respectively. For the thirteen weeks ended September 27, 2017, there were no stock options granted, and for the thirty-nine weeks ended September 27, 2017, 128,252 stock options were granted at the fair market value on the date of grant. For the thirteen and thirty-nine weeks ended September 28, 2016, there were stock option grants of 9,875 and 329,673, respectively, granted at the fair market value on the date of grant. At September 27, 2017,2022, the Company had total unrecognized compensation expense of $1.4$2.5 million related to unvested stock options, which it expects to recognize over a weighted-average period of 2.93.20 years.
A summary of restricted share activity as of September 28, 2022 and thirty-nine weeks ended September 27, 2017, 1,248 and 170,924 restricted shares were granted, respectively, at the fair market value on the date of grant. There were 21,453 and 29,259 restricted shares granted at the fair market value on the date of grantchanges during the thirteen and thirty-nine weeks ended September 28, 2016, respectively. The restricted shares will vest ratably over four years for employees and three years for directors, from their grant date. 2022 is as follows:
| | | | | |
|
| |
| Weighted-Average | |
| | Shares | | Fair Value | |
Unvested shares at December 29, 2021 |
| 495,780 | | $ | 13.92 |
Granted |
| 352,114 | | $ | 10.36 |
Released |
| (180,696) | | $ | 13.10 |
Forfeited, cancelled, or expired |
| (27,931) | | $ | 14.01 |
Unvested shares at September 28, 2022 |
| 639,267 | | $ | 12.19 |
At September 27, 2017, there were 187,710 unvested restricted shares outstanding. At September 27, 2017,28, 2022, the Company had total unrecognized compensation expense of $2.4$6.4 million related to unvested restricted shares, which it expects to recognize over a weighted-average period of 3.42.76 years.
Total stock-based compensation expense was $0.3$1.0 million and $0.7 million for the thirteen and thirty-nine weeks ended September 27, 2017, respectively, and $0.1 million and $0.2$2.8 million for the thirteen and thirty-nine weeks ended September 28, 2016, respectively. In connection with2022, respectively, and $1.0 million and $2.9 million for the separation of its former audit committee chair, during thethirteen and thirty-nine weeks ended September 29, 2021.
4. LONG-TERM DEBT
On July 27, 2017, the Company modified previously granted equity awards to allow for additional time to exercise previously vested awards following his separation date. As a result, the Company incurred incremental stock-based compensation expense of less than $0.1 million for the thirty-nine weeks ended September 27, 2017.
The 20142022 Revolver includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. At September 27, 2017, $8.1 million of letters of credit,The 2022 Revolver and $85.0 million of the revolving line of credit were outstanding. The amount available under the revolving line of credit was $106.9 million at September 27, 2017. The 2014 Revolver2022 Credit Agreement will mature on July 27, 2027. The obligations under the 2022 Credit Agreement and related loan documents are guaranteed by Holdings and Intermediate. The obligations of Holdings, EPL and Intermediate under the 2022 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.
The special dividend announced by the Company’s Board of Directors on October 11, 2022 is permitted under the terms of 2022 Revolver pursuant to both subclause (iii)(d) and (iii)(e) of the preceding sentence. Under the 2022 Revolver, Holdings is restricted from making certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $1.0 million per year to repurchase or about December 11, 2019.
Borrowings under the 2014 Revolver2022 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBORthe secured overnight financing rate (“SOFR”) or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is
16
calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate ofpublished Bank of America prime rate, or (c) LIBORTerm SOFR with a term of one-month SOFR plus 1.00%. For LIBORTerm SOFR loans, the margin is in the range of 1.75%1.25% to 2.50%2.25%, and for base rate loans the margin is in thea range of 0.75%0.25% to 1.50%1.25%. Borrowings under the 2022 Revolver may be repaid and reborrowed. The interest rate range was 2.96%2.87% to 2.99%6.00% and 2.44%1.35% to 2.99% for the thirteen and thirty-nine weeks ended September 27, 2017, respectively, and 2.20% to 2.27% and 2.02% to 2.27%6.00% for the thirteen and thirty-nine weeks ended September 28, 2016, respectively.
The 2022 Credit Agreement contains certain financial covenants. The Company was in compliance with the financial covenants as of September 28, 2022.
At September 28, 2022, $10.0 million of letters of credit and $20.0 million in borrowings under the 2022 Revolver were outstanding. The Company had $120.0 million in borrowing availability under the 2022 Revolver at September 28, 2022.
Maturities
On July 27, 2017,2022, the Company electedrefinanced and terminated the 2018 Revolver pursuant to pay down $9.5 million and $19.0 million, respectively, of outstanding borrowings on the Company's 2014 Revolver, primarily from its cash flow from operations.2022 Credit Agreement. During both the thirteen and thirty-nine weeks ended September 28, 2016,2022 the Company electedpaid down $20.0 million on the 2022 Revolver. During the thirty-nine weeks ended September 29, 2021, the Company paid down $22.8 million on the 2018 Revolver none of which was paid during the thirteen weeks ended September 29, 2021.
Interest Rate Swap
During the year ended December 25, 2019, the Company entered into a variable-to-fixed interest rate swap agreement with a notional amount of $40.0 million that matures in June 2023. The objective of the interest rate swap was to pay down $9.5reduce the Company’s exposure to interest rate risk for a portion of its variable-rate interest payments on its borrowings under the 2018 Revolver. The interest rate swap was designated as a cash flow hedge, as the changes in the future cash flows of the swap were expected to offset changes in expected future interest payments on the related variable-rate debt, in accordance with Accounting Standards Codification (“ASC”) 815 “Derivatives and Hedging.”
In connection with the Company’s entry into the 2022 Credit Agreement, it terminated the interest rate swap on July 28, 2022 which was previously used to hedge interest rate risk. Prior to the interest rate swap termination, the swap was a highly effective cash flow hedge. In settlement of this swap, the Company received approximately $0.6 million and $16.0derecognized the corresponding interest rate swap asset. The remaining amount in AOCI related to the hedging relationship will be reclassified into earnings when the hedged forecasted transaction is reported in earnings.
As of September 28, 2022, the estimated net gains included in AOCI related to the Company’s cash flow hedge that will be reclassified into earnings in the next 12 months is $0.3 million, respectively,based on current Term SOFR interest rates.
The following table shows the financial statement line item and amount of outstanding borrowingsthe Company’s cash flow hedge accounting on the Company's 2014 Revolver.condensed consolidated balance sheets (in thousands):
| | | | | | | | | | | | |
| | September 28, 2022 | | December 29, 2021 | ||||||||
|
| Notional |
| Fair value |
| Notional |
| Fair value | ||||
Other liabilities - Interest rate swap | | $ | — | | $ | — | | $ | 40,000 | | $ | 396 |
The following table summarizes the effect of the Company’s cash flow hedge accounting on the condensed consolidated statements of income (in thousands):
| | | | | | | | | | | | |
|
| Thirteen Weeks Ended | | Thirty-Nine Weeks Ended | ||||||||
|
| September 28, 2022 |
| September 29, 2021 | | September 28, 2022 |
| September 29, 2021 | ||||
Interest expense on hedged portion of debt | | $ | 92 | | $ | 97 | | $ | 439 | | | 433 |
Interest (income) expense on interest rate swap |
| | (369) |
| | 133 | | | (197) |
| | 367 |
Interest (income) expense on debt and derivatives, net | | $ | (277) | | $ | 230 | | $ | 242 | | $ | 800 |
17
The following table summarizes the effect of the Company’s cash flow hedge accounting on AOCI for the thirteen and thirty-nine weeks ended September 28, 2022 and September 29, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended | ||||||||||||||||||||
| | | | Loss Reclassified from | | | | Loss Reclassified from | ||||||||||||||||
| | Net Gain (Loss) Recognized in OCI | | AOCI into Interest (Income) Expense | | Net Gain Recognized in OCI | | AOCI into Interest (Income) Expense | ||||||||||||||||
|
| September 28, 2022 | | September 29, 2021 | | September 28, 2022 | | September 29, 2021 |
| September 28, 2022 | |
| September 29, 2021 |
| September 28, 2022 | |
| September 29, 2021 | ||||||
Interest rate swap | | $ | 43 | | $ | (32) | | $ | (369) | | $ | 133 | | $ | 974 | | $ | 44 | | $ | (197) | | $ | 367 |
See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” for information about the fair value of the Company’s derivative asset.
5. OTHER ACCRUED EXPENSES AND CURRENT LIABILITIES
Other accrued expenses and current liabilities consist of the following (in thousands):
September 27, 2017 | December 28, 2016 | ||||||
Accrued sales and property taxes | $ | 5,255 | $ | 4,223 | |||
Income tax receivable agreement payable | 20,506 | 12,349 | |||||
Gift card liability | 1,786 | 1,870 | |||||
Other | 5,185 | 3,579 | |||||
Total other accrued expenses and current liabilities | $ | 32,732 | $ | 22,021 |
| | | | | | |
|
| September 28, 2022 |
| December 29, 2021 | ||
Accrued sales and property taxes | | $ | 5,652 | | $ | 4,726 |
Gift card liability | |
| 3,957 | |
| 4,622 |
Loyalty rewards program liability | | | 537 | | | 687 |
Accrued advertising | | | — | | | 3,635 |
Accrued legal settlements and professional fees | |
| 1,161 | |
| 771 |
Deferred franchise and development fees | |
| 627 | |
| 637 |
Employer social security tax deferral | | | 2,543 | | | — |
Other | |
| 4,453 | |
| 4,718 |
Total other accrued expenses and current liabilities | | $ | 18,930 | | $ | 19,796 |
Other noncurrent liabilities consist of the following (in thousands):
September 27, 2017 | December 28, 2016 | ||||||
Deferred rent | $ | 8,835 | $ | 8,328 | |||
Income tax receivable agreement payable | 18,256 | 26,306 | |||||
Other | 3,648 | 2,354 | |||||
Total other noncurrent liabilities | $ | 30,739 | $ | 36,988 |
| | | | | | |
|
| September 28, 2022 |
| December 29, 2021 | ||
Deferred franchise and development fees | | $ | 5,761 | | $ | 5,691 |
Derivative liability | | | — | | | 396 |
Employer social security tax deferral | | | — | | | 2,426 |
Other | |
| 101 | |
| 140 |
Total other noncurrent liabilities | | $ | 5,862 | | $ | 8,653 |
7. COMMITMENTS AND CONTINGENCIES
Legal Matters
On or about November 5, 2015, a purported Holdings shareholder filed a derivative complaint on behalf of Holdings in the Court of Chancery of the State of Delaware against certain Holdings officers, directors and Trimaran Pollo Partners, L.L.C., under the caption
Armen Galustyan v. Sather, et al. (Case No. 11676-VCL). The derivative complaint alleges that these defendants breached their fiduciary duties to Holdings and were unjustly enriched when they sold shares of Holdings at artificially inflated prices due to alleged misrepresentations and omissions regarding EPL’s comparable store sales in the second quarter of 2015. The Holdings shareholder’s requested remedies include an award of compensatory damages to Holdings, as well as a court order to improve corporate governance by putting forward for stockholder vote certain resolutions for amendments to Holdings’ Bylaws or Certificate of Incorporation. The18
Chancery. The Diep action is also purportedly brought on behalf of Holdings, names the same defendants and asserts substantially the same claims on substantially the same alleged facts as does Galustyan.Galustyan. Defendants moved to stay or dismiss the Diep action.
On March 17, 2017, the Delaware court granted in part, and denied in part, the motion to stay the
Diep action. The court deniedOn May 21, 2021, while the SLC’s motion to dismiss the Diep action was pending, the Company filed a notice of proposed partial settlement of the Diep action with respect to defendants Kay Bogeajis, Laurance Roberts, Stephen J. Sather, Edward J. Valle, Douglas K. Ammerman, and Samuel N. Borgese (collectively, the “Settling Defendants”). Defendant Trimaran Pollo Partners, LLC (“Trimaran”) was not a party to the settlement. The court approved the settlement of $625,000, less Plaintiffs’ fees of $156,250, on September 10, 2021, and dismissed all claims brought, or that could have been brought, against Settling Defendants. In connection with this settlement, the Company received $469,000 in insurance proceeds, which was recorded within general and administrative expenses in the Company’s statement of income for the
On July 30, 2021, the court granted the SLC’s motion to dismiss with respect to the claims asserted against remaining defendant Trimaran. On October 4, 2021, Plaintiffs filed a notice of appeal of the court’s granting of the motion to dismiss against defendant Trimaran. Plaintiff filed its opening brief on December 6, 2021. SLC filed its answering brief on December 20, 2021 and the public version of the brief was filed on January 7, 2022. Plaintiffs filed the reply brief on January 4, 2022. The hearing on the appeal took place on March 30, 2022. On June 28, 2022, the court’s granting of the motion to dismiss against Trimaran was affirmed.
The Company is also involved in various other claims such as wage and hour and other legal actions that arise in the ordinary course of business. The outcomes of these actions are not predictable but the Company does not believe that the ultimate resolution of these other actions will have a material adverse effect on its financial position, results of operations, liquidity, or capital resources. A significant increase in the number of claims, or an increase in amounts owing under successful claims, could materially and adversely affect its business, condensed consolidated financial condition, results of operations, and cash flows.
Purchasing Commitments
The Company has long-term beverage supply agreements with certain major beverage vendors. Pursuant to the terms of these arrangements, marketing rebates are provided to the Company and its franchisees from the beverage vendors based upon the dollar volume of purchases for system-wide restaurants which will vary according to their demand for beverage syrup and fluctuations in the market rates for beverage syrup. These contracts have terms extending through the end of 2024.
At September 27, 2017,28, 2022, the Company’s total estimated commitment to purchase chicken was $11.3$9.3 million.
Contingent Lease Obligations
As a result of assigning the Company’s interest in obligations under real estate leases in connection with the sale of company-operated restaurants to some of the Company’s franchisees, the Company is contingently liable on fivethree lease agreements. These leases have various terms, the latest of which expires in 2036. As of September 27, 2017,28, 2022, the potential amount of undiscounted payments the Company could be required to make in the event of non-payment by the primary lessee was $2.9$2.4 million. The present value of these potential payments discounted at the Company’s estimated pre-tax cost of debt at September 27, 201728, 2022 was $2.5$1.9 million. The Company’s franchisees are primarily liable on the leases. The Company has cross-default provisions with
19
Employment Agreements
As of September 28, 2022, the Company’s condensed consolidated financial statements related to these contingent liabilities.
Indemnification Agreements
The Company has entered into indemnification agreements with each of its current directors and officers. These agreements require the Company to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to the Company and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company also intends to enter into indemnification agreements with future directors and officers.
Basic net (loss) incomeearnings per share (“EPS”) is calculated using the weighted-average number of shares of common stock outstanding during the thirteen and thirty-nine weeks ended September 27, 201728, 2022 and September 28, 2016.29, 2021. Diluted net (loss) income per shareEPS is calculated using the weighted-average number of shares of common stock outstanding and potentially dilutive during the period, using the treasury stock method.
Below are basic and diluted net (loss) income per shareEPS data for the periods indicated which are in(in thousands except for share and per share data.
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
September 27, 2017 | September 28, 2016 | September 27, 2017 | September 28, 2016 | ||||||||||||
Numerator: | |||||||||||||||
Net (loss) income | $ | (4,039 | ) | $ | 5,211 | $ | 8,657 | $ | 17,921 | ||||||
Denominator: | |||||||||||||||
Weighted-average shares outstanding—basic | 38,462,100 | 38,415,189 | 38,449,453 | 38,331,400 | |||||||||||
Weighted-average shares outstanding—diluted | 38,462,100 | (a) | 39,083,577 | 39,101,214 | 39,020,127 | ||||||||||
Net (loss) income per share—basic | $ | (0.11 | ) | $ | 0.14 | $ | 0.23 | $ | 0.47 | ||||||
Net (loss) income per share—diluted | $ | (0.11 | ) | $ | 0.13 | $ | 0.22 | $ | 0.46 | ||||||
Anti-dilutive securities not considered in diluted EPS calculation | 2,490,029 | 451,325 | 749,421 | 451,325 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended | | ||||||||
|
| September 28, 2022 |
| September 29, 2021 | | September 28, 2022 |
| September 29, 2021 |
| ||||
Numerator: |
| |
|
| |
| | |
|
| |
|
|
Net income | | $ | 5,009 | | $ | 10,161 | | $ | 14,265 | | $ | 22,943 | |
Denominator: | |
|
| |
|
| |
|
| |
|
| |
Weighted-average shares outstanding—basic | |
| 36,402,899 | |
| 36,067,754 | |
| 36,329,938 | |
| 35,930,246 | |
Weighted-average shares outstanding—diluted | |
| 36,507,050 | |
| 36,525,424 | |
| 36,491,624 | |
| 36,457,110 | |
Net income per share—basic | | $ | 0.14 | | $ | 0.28 | | $ | 0.39 | | $ | 0.64 | |
Net income per share—diluted | | $ | 0.14 | | $ | 0.28 | | $ | 0.39 | | $ | 0.63 | |
Anti-dilutive securities not considered in diluted EPS calculation | |
| 1,434,825 | |
| 225,308 | |
| 944,183 | |
| 118,968 | |
Below is a reconciliation of basic and diluted share counts.
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||
September 27, 2017 | September 28, 2016 | September 27, 2017 | September 28, 2016 | ||||||||
Weighted-average shares outstanding— basic | 38,462,100 | 38,415,189 | 38,449,453 | 38,331,400 | |||||||
Dilutive effect of stock options and restricted shares | — | (a) | 668,388 | 651,761 | 688,727 | ||||||
Weighted-average shares outstanding— diluted | 38,462,100 | 39,083,577 | 39,101,214 | 39,020,127 |
| | | | | | | | | |
| | | | | | | | | |
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||
| | September 28, 2022 | | September 29, 2021 | | September 28, 2022 | | September 29, 2021 | |
Weighted-average shares outstanding—basic |
| 36,402,899 |
| 36,067,754 |
| 36,329,938 |
| 35,930,246 |
|
Dilutive effect of stock options and restricted shares |
| 104,151 |
| 457,670 |
| 161,686 |
| 526,864 |
|
Weighted-average shares outstanding—diluted |
| 36,507,050 |
| 36,525,424 |
| 36,491,624 |
| 36,457,110 |
|
9. RELATED PARTY TRANSACTIONS
As of September 28, 2022, Trimaran Pollo Partners, L.L.C. (“LLC”), ownsFS Equity Partners V, L.P. and FS Affiliates V, L.P. own approximately 43.3%30.2%, 14.7% and 0.2%, respectively, of our outstanding common stock. FS Equity V and FS Affiliates V, which previously indirectly held shares of our common stock through LLC, received shares directly on August 31, 2022, upon LLC’s pro rata distribution in kind of shares of our common stock to FS Equity V and FS Affiliates V.
20
10. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
Nature of products and services
The Company has two revenue streams, company-operated restaurant revenue and franchise related revenue.
Company-operated restaurant revenue
Revenues from the operation of company-operated restaurants are recognized as food and beverage products are delivered to customers and payment is tendered at the time of sale. The Company presents sales, net of sales-related taxes and promotional allowances.
The Company offers a loyalty rewards program, which awards a customer points for dollars spent. Customers earn points for each dollar spent and 50 points can be redeemed for a $5 reward to be used for a future purchase. If a customer does not earn or use points within a one-year period, their account is deactivated and all points expire. Additionally, if a reward is not used within six months, it expires. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty points terms. As of September 28, 2022 and December 29, 2021, the revenue allocated to loyalty points that have not been redeemed was $0.5 million and $0.7 million, respectively, which is reflected in the Company’s outstanding common stock. This large position means that LLCaccompanying condensed consolidated balance sheets within other accrued expenses and current liabilities. The Company expects the loyalty points to be redeemed and recognized over a one-year period.
The Company sells gift cards to its majority owners—predecessorscustomers in the restaurants and affiliatesthrough selected third parties. The gift cards sold to customers have no stated expiration dates and are subject to actual and/or potential escheatment rights in several of and certain funds managed by, Trimaran Capital Partners and Freeman Spogli & Co. (collectively, “Trimaran” and “Freeman Spogli,” respectively)—possess significant influence when stockholders vote on matters such as election of directors, mergers, consolidations and acquisitions,the jurisdictions in which the Company operates. Furthermore, due to these escheatment rights, the Company does not recognize breakage related to the sale of all or substantially allgift cards due to the immateriality of the Company’s assets, decisions affectingamount remaining after escheatment. The Company recognizes income from gift cards when redeemed by the customer. Unredeemed gift card balances are deferred and recorded as other accrued expenses on the accompanying condensed consolidated balance sheets.
Franchise and franchise advertising revenue
Franchise revenue consists of franchise royalties, initial franchise fees, license fees due from franchisees, IT support services, and rental income for subleases to franchisees. Franchise advertising revenue consists of advertising contributions received from franchisees. These revenue streams are made up of the following performance obligations:
● | Franchise license - inclusive of advertising services, development agreements, training, access to plans and help desk services. |
● | Discounted renewal option. |
● | Hardware services. |
The Company satisfies the performance obligation related to the franchise license over the term of the franchise agreement, which is typically 20 years. Payment for the franchise license consists of three components, a fixed-fee related to the franchise/development agreement, a sales-based royalty fee and a sales-based advertising fee. The fixed fee, as determined by the signed development and/or franchise agreement, is due at the time the development agreement is entered into, and/or when the franchise agreement is signed, and does not include a finance component.
The sales-based royalty fee and sales-based advertising fee are considered variable consideration and will continue to be recognized as revenue as such sales are earned by the franchisees. Both sales-based fees qualify under the royalty constraint exception, and do not require an estimate of future transaction price. Additionally, the Company is utilizing the practical expedient available under ASC Topic 606, “Revenue from Contracts with Customers” (“Topic 606”)
21
regarding disclosure of the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied for sales-based royalties.
In certain franchise agreements, the Company offers a discounted renewal to incentivize future renewals after the end of the initial franchise term. As this is considered a separate performance obligation, the Company allocates a portion of the initial franchise fee to this discounted renewal, on a pro-rata basis, assuming a 20-year renewal. This performance obligation is satisfied over the renewal term, typically 10 or 20 years, while payment is fixed and due at the time the renewal is signed.
The Company purchases hardware, such as scanners, printers, cash registers and tablets, from third party vendors, which it then sells to franchisees. As the Company is considered the principal in this relationship, payment for the hardware is considered revenue, and is received upon transfer of the goods from the Company to the franchisee. As of September 28, 2022, there were no performance obligations related to hardware services that were unsatisfied or partially satisfied.
Disaggregated revenue
The following table presents the Company’s capital structure, amendmentsrevenues disaggregated by revenue source and market (in thousands):
| | | | | | | | | | | | | |
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended | |||||||||
|
| September 28, |
| September 29, |
| | September 28, |
| | September 29, | | ||
| | 2022 | | 2021 |
| | 2022 | | | 2021 | | ||
Core Market(1): |
| |
|
| |
| | |
|
| |
| |
Company-operated restaurant revenue | | $ | 98,732 | | $ | 95,292 | | $ | 289,798 | | $ | 281,945 | |
Franchise revenue | |
| 4,501 | |
| 4,184 | |
| 13,559 | |
| 11,956 | |
Franchise advertising fee revenue | |
| 3,336 | |
| 3,129 | |
| 10,008 | |
| 8,989 | |
Total core market | | $ | 106,569 | | $ | 102,605 | | $ | 313,365 | | $ | 302,890 | |
Non-Core Market(2): | |
|
| |
|
| |
|
| |
|
| |
Company-operated restaurant revenue | | $ | 4,442 | | $ | 4,694 | | $ | 13,787 | | $ | 19,172 | |
Franchise revenue | |
| 5,042 | |
| 4,733 | |
| 15,303 | |
| 12,963 | |
Franchise advertising fee revenue | |
| 3,825 | |
| 3,668 | |
| 11,582 | |
| 10,381 | |
Total non-core market | | $ | 13,309 | | $ | 13,095 | | $ | 40,672 | | $ | 42,516 | |
Total revenue | | $ | 119,878 | | $ | 115,700 | | $ | 354,037 | | $ | 345,406 | |
(1) | Core Market includes markets with existing company-operated restaurants at the time of the Company’s IPO on July 28, 2014. |
(2) | Non-Core Market includes markets entered into by the Company subsequent to the IPO date. |
The following table presents the Company’s certificaterevenues disaggregated by geographic market:
| | | | | | | | | | |
| | Thirteen Weeks Ended | | | Thirty-Nine Weeks Ended | | ||||
|
| September 28, 2022 |
| September 29, 2021 |
| | September 28, 2022 |
| September 29, 2021 |
|
Greater Los Angeles area market |
| 71.9 | % | 71.6 | % | | 71.2 | % | 70.8 | % |
Other markets |
| 28.1 | % | 28.4 | % | | 28.8 | % | 29.2 | % |
Total |
| 100 | % | 100 | % | | 100 | % | 100 | % |
22
Contract balances
The following table provides information about the change in the franchise contract liability balances during the thirty-nine weeks ended September 28, 2022 and September 29, 2021 (in thousands):
| | | |
December 29, 2021 | | $ | 6,328 |
Revenue recognized - beginning balance | |
| (558) |
Additional contract liability | |
| 618 |
September 28, 2022 | | $ | 6,388 |
| | | |
December 30, 2020 | | $ | 5,628 |
Revenue recognized - beginning balance | |
| (514) |
Additional contract liability | |
| 1,330 |
September 29, 2021 | | $ | 6,444 |
The Company’s franchise contract liability includes development fees, initial franchise and license fees, franchise renewal fees, lease subsidies and royalty discounts and is included within other accrued expenses and current liabilities and other noncurrent liabilities within the accompanying condensed consolidated balance sheets. The Company receives area development fees from franchisees when they execute multi-unit area development agreements. Initial franchise and license fees, or by-laws, andfranchise renewal fees, are received from franchisees upon the Company’s winding up and dissolution. So longexecution of, or renewal of, a franchise agreement. Revenue is recognized from these agreements as LLC maintains at least 40% ownership, (i) any memberthe underlying performance obligation is satisfied, which is over the term of the boardagreement.
The following table illustrates the estimated revenue to be recognized in future periods related to performance obligations under the applicable contracts that are unsatisfied as of directors maySeptember 28, 2022 (in thousands):
| | | |
Franchise revenues: |
| |
|
2022 | | $ | 167 |
2023 | |
| 608 |
2024 | |
| 515 |
2025 | |
| 468 |
2026 | |
| 445 |
Thereafter | |
| 4,185 |
Total | | $ | 6,388 |
Changes in the loyalty rewards program liability included in deferred revenue within other accrued expenses and current liabilities on the condensed consolidated balance sheets were as follows (in thousands):
| | | | | | | |
|
| September 28, | | December 29, | | ||
| | 2022 | | 2021 | | ||
Loyalty rewards liability, beginning balance | | $ | 687 | | $ | 900 | |
Revenue deferred | |
| 2,039 | |
| 2,677 | |
Revenue recognized | |
| (2,189) | |
| (2,890) | |
Loyalty rewards liability, ending balance | | $ | 537 | | $ | 687 | |
The Company expects all loyalty points revenue related to performance obligations unsatisfied as of September 28, 2022 to be removedrecognized within one year.
Gift Cards
The gift card liability included in other accrued expenses and current liabilities on the condensed consolidated balance sheets was as follows (in thousands):
23
| | | | | | |
|
| September 28, | | December 29, | ||
| | 2022 | | 2021 | ||
Gift card liability | | $ | 3,957 | | $ | 4,622 |
Revenue recognized from the redemption of gift cards that was included in other accrued expenses and current liabilities at any time without cause by affirmative votethe beginning of the year was as follows (in thousands):
| | | | | | | | | | | |
| Thirteen Weeks Ended | | Thirty-Nine Weeks Ended | ||||||||
| September 28, 2022 | | September 29, 2021 |
| September 28, 2022 | | September 29, 2021 | ||||
| | | | | | | | | | | |
Revenue recognized from gift card liability balance at the beginning of the year | $ | 237 | | $ | 220 | | $ | 967 | | $ | 903 |
| | | | | | | | | | | |
Contract Costs
The Company does not currently incur costs to obtain or fulfill a contract that would be considered contract assets under Topic 606.
11. LEASES
Nature of leases
The Company’s operations utilize property, facilities, equipment and vehicles leased from others. Additionally, the Company has various contracts with vendors that have been determined to contain an embedded lease in accordance with Topic 842.
As of September 28, 2022, the Company had one lease that it had entered into, but had not yet commenced. The Company does not have control of the property until lease commencement.
Building and facility leases
The majority of the Company’s common stock,building and (ii) stockholders representing 40%facilities leases are classified as operating leases; however, the Company currently has one facility and ten equipment leases that are classified as finance leases.
Restaurants are operated under lease arrangements that generally provide for a fixed base rent and, in some instances, contingent rent based on a percentage of gross operating profit or greater ownership may cause special stockholder meetingsnet revenues in excess of a defined amount. Additionally, a number of the Company’s leases have payments that increase at pre-determined dates based on the change in the consumer price index. For all leases, the Company also reimburses the landlord for non-lease components, or items that are not considered components of a contract, such as CAM, property tax and insurance costs. While the Company determined not to separate lease and non-lease components, these payments are based on actual costs, making them variable consideration and excluding them from the calculations of the ROU asset and lease liability.
The initial terms of land and restaurant building leases are generally 20 years, exclusive of options to renew. These leases typically have four 5-year renewal options, which have generally been excluded in the calculation of the ROU asset and lease liability, as they are not considered reasonably certain to be called.exercised, unless (1) the renewal had already occurred as of the time of adoption of Topic 842, or (2) there have been significant leasehold improvements that have a useful life that extend past the original lease term. Furthermore, there are no residual value guarantees and no restrictions imposed by the lease.
During the thirteen and thirty-nine weeks ended September 28, 2022, the Company reassessed the lease terms on five and 18 restaurants, respectively, due to certain triggering events, such as the addition of significant leasehold improvements with useful lives that extend past the current lease expiration, the decision to terminate a lease, or the decision to renew. As a result of the reassessment, an additional $2.0 million and $10.5 million of ROU asset and lease liabilities for the thirteen and thirty-nine weeks ended September 28, 2022, respectively, were recognized and will be amortized over the new lease term. During the thirteen and thirty-nine weeks ended September 29, 2021, the Company reassessed the lease terms on four and 16 restaurants, respectively, due to certain triggering events, such as the addition
24
of significant leasehold improvements with useful lives that extend past the current lease expiration, the decision to terminate a lease, or the decision to renew. This reassessment resulted in an additional $2.6 million and $13.8 million of ROU asset and lease liabilities for the thirteen and thirty-nine weeks ended September 29, 2021, respectively, which were recognized and will be amortized over the new lease term. The reassessments had an impact on the original lease classification of one property during the thirty-nine weeks ended September 28, 2022 which represented $0.7 million of the $10.5 million total additional ROU asset and lease liabilities for the period. There were no reassessments that impacted the original lease classification during the thirteen weeks ended September 28, 2022. Additionally, as the Company adopted all practical expedients available under Topic 842, no reallocation between lease and non-lease components was necessary.
The Company also subleases facilities to certain franchisees and other non-related parties which are also considered operating leases. Sublease income also includes contingent rental income based on net revenues. The vast majority of these leases have rights to extend terms via fixed rental increases. However, none of these leases have early termination rights, the right to purchase the premises or any residual value guarantees. The Company does not have any related party leases.
During the thirty-nine weeks ended September 28, 2022, the Company recorded a less than $0.1 million non-cash impairment charge related to one restaurant in California. The Company recorded a $0.4 million non-cash impairment charge for the thirty-nine weeks ended September 29, 2021 related to one restaurant closed in Texas in 2019 and one restaurant in California. See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies – Impairment of Long-Lived Assets and ROU Assets” for additional information.
Equipment
Leases of equipment primarily consist of restaurant equipment, copiers and vehicles. These leases are fixed payments with no variable component. Additionally, no optional renewal periods have been included in the calculation of the ROU asset, there are no residual value guarantees and no restrictions imposed.
Significant Assumptions and Judgments
In applying the requirements of Topic 842, the Company made significant assumptions and judgments related to determination of whether a contract contains a lease and the discount rate used for the lease.
In determining if any of the Company’s contracts contain a lease, the Company made assumptions and judgments related to its ability to direct the use of any assets stated in the contract and the likelihood of renewing any short-term contracts for a period extending past twelve months.
The Company also made significant assumptions and judgments in determining an appropriate discount rate for property leases. These included using a consistent discount rate for a portfolio of leases entered into at varying dates, using the full 20-year term of the lease, excluding any options, and using the total minimum lease payments. The Company utilizes a third-party valuation firm in determining the discount rate, based on the above assumptions. For all other leases, the Company uses the discount rate implicit in the lease, or the Company’s incremental borrowing rate.
As the Company has adopted the practical expedient not to separate lease and non-lease components, no significant assumptions or judgments were necessary in allocating consideration between these components, for all classes of underlying assets.
25
The following table presents the Company’s total lease cost, disaggregated by underlying asset (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | ||||||||||||||||
|
| September 28, 2022 | | September 29, 2021 | ||||||||||||||
|
| Property |
| Equipment |
| | | | Property | | Equipment | | | | ||||
| | Leases | | Leases | | Total | | Leases | | Leases | | Total | ||||||
Finance lease cost: |
| |
|
| |
|
| |
| | | | | | | | | |
Amortization of right-of-use assets | | $ | 18 | | $ | 1 | | $ | 19 | | $ | 18 | | $ | 1 | | $ | 19 |
Interest on lease liabilities | | | 10 | | | 1 | | | 11 | | | 14 | | | 1 | | | 15 |
Operating lease cost | |
| 6,646 | |
| 256 | |
| 6,902 | |
| 6,552 | |
| 267 | |
| 6,819 |
Short-term lease cost | |
| — | |
| 4 | |
| 4 | |
| — | |
| 7 | |
| 7 |
Variable lease cost | |
| 151 | |
| 196 | |
| 347 | |
| 138 | |
| 70 | |
| 208 |
Sublease income | |
| (1,130) | |
| — | |
| (1,130) | |
| (1,128) | |
| — | |
| (1,128) |
Total lease cost | | $ | 5,695 | | $ | 458 | | $ | 6,153 | | $ | 5,594 | | $ | 346 | | $ | 5,940 |
| | | | | | | | | | | | | | | | | | |
| | Thirty-Nine Weeks Ended | ||||||||||||||||
| | September 28, 2022 | | September 29, 2021 | ||||||||||||||
| | Property |
| Equipment |
| | | | Property |
| Equipment |
| | | ||||
| | Leases | | Leases | | Total | | Leases | | Leases | | Total | ||||||
Finance lease cost: | | |
|
| |
|
| |
| | |
|
| |
|
| |
|
Amortization of right-of-use assets | | $ | 55 | | $ | 2 | | $ | 57 | | $ | 60 | | $ | 2 | | $ | 62 |
Interest on lease liabilities | | | 32 | | | 2 | |
| 34 | |
| 44 | | | 2 | |
| 46 |
Operating lease cost | |
| 19,795 | |
| 776 | |
| 20,571 | |
| 19,935 | |
| 861 | |
| 20,796 |
Short-term lease cost | |
| — | |
| 11 | |
| 11 | |
| — | |
| 17 | |
| 17 |
Variable lease cost | |
| 458 | |
| 463 | |
| 921 | |
| 413 | |
| 260 | |
| 673 |
Sublease income | |
| (3,387) | |
| — | |
| (3,387) | |
| (2,722) | |
| — | |
| (2,722) |
Total lease cost | | $ | 16,953 | | $ | 1,254 | | $ | 18,207 | | $ | 17,730 | | $ | 1,142 | | $ | 18,872 |
The following table presents the Company’s total lease cost on the condensed consolidated statements of income (in thousands):
| | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | | Thirty-Nine Weeks Ended | ||||||||
|
| September 28, 2022 |
| September 29, 2021 | |
| September 28, 2022 |
| September 29, 2021 | ||||
Lease cost – Occupancy and other operating expenses | | $ | 5,969 | | $ | 5,811 | | | $ | 17,709 | | $ | 18,191 |
Lease cost – General & administrative | |
| 133 | | | 97 | | |
| 343 | | | 316 |
Lease cost – Depreciation and amortization | |
| 18 | | | 18 | | |
| 55 | | | 60 |
Lease cost – Interest expense | |
| 11 | | | 14 | | |
| 35 | | | 44 |
Lease cost – Closed-store reserve | |
| 22 | | | — | | |
| 65 | | | 261 |
Total lease cost | | $ | 6,153 | | $ | 5,940 | | | $ | 18,207 | | $ | 18,872 |
26
During the thirteen and thirty-nine weeks ended September 28, 2022 and September 29, 2021, the Company had the following cash and non-cash activities associated with its leases (dollars in thousands):
| | | | | | | | | | | | | | | | | | |
| | Thirty-Nine Weeks Ended September 28, 2022 | | Thirty-Nine Weeks Ended September 29, 2021 | ||||||||||||||
|
| Property |
| Equipment |
| | |
| Property |
| Equipment |
| | | ||||
| | Leases | | Leases | | Total | | Leases | | Leases | | Total | ||||||
Cash paid for amounts included in the measurement of lease liabilities |
| |
|
| |
|
| |
| | | | | | | | | |
Operating cash flows used for operating leases | | $ | 20,364 | | $ | 737 |
| $ | 21,101 | | $ | 19,371 | | $ | 831 | | $ | 20,202 |
Financing cash flows used for finance leases | | $ | 82 | | $ | 42 |
| $ | 124 | | $ | 67 | | $ | 33 | | $ | 100 |
| | | | | | | | | | | | | | | | | | |
Non-cash investing and financing activities: | |
|
| |
|
|
| |
| | | | | | | | | |
Operating lease ROU assets obtained in exchange for lease liabilities: | |
|
| |
|
|
| |
| | | | | | | | | |
Operating lease ROU assets | | $ | 10,486 | | $ | 86 |
| $ | 10,572 | | $ | 13,848 | | $ | — | | $ | 13,848 |
Finance lease ROU assets obtained in exchange for lease liabilities: | | | | | | | | | | | | | | | | | | |
Finance lease ROU assets | | $ | — | | $ | 28 | | $ | 28 | | $ | — | | $ | 196 | | $ | 196 |
Derecognition of ROU assets due to terminations, impairment or modifications | | $ | (39) | | $ | (24) |
| $ | (63) | | $ | (4,513) | | $ | (99) | | $ | (4,612) |
| | | | | | | | | | | | | | | | | | |
Other Information | |
|
| |
|
|
| |
| | | | | | | | | |
Weighted-average remaining years in lease term—finance leases | |
| 18.12 | |
| 3.44 | | |
| | | 18.56 | | | 4.27 | | | |
Weighted-average remaining years in lease term—operating leases | |
| 10.91 | |
| 1.57 | | |
| | | 11.37 | | | 1.66 | | | |
Weighted-average discount rate—finance leases | |
| 2.57 | % |
| 1.53 | % | |
| | | 2.84 | % | | 1.54 | % | | |
Weighted-average discount rate—operating leases | |
| 4.49 | % |
| 3.82 | % | |
| | | 4.43 | % | | 3.91 | % | | |
Information regarding the Company’s minimum future lease obligations as of September 28, 2022 is as follows (in thousands):
| | | | | | | | | |
| | Finance | | Operating Leases | |||||
|
| Minimum |
| Minimum |
| Minimum | |||
| | Lease | | Lease | | Sublease | |||
For the Years Ending | | Payments | | Payments | | Income | |||
December 28, 2022 | | $ | 38 | | $ | 7,073 | | $ | 937 |
December 27, 2023 | |
| 151 | |
| 27,673 | |
| 3,698 |
December 25, 2024 | |
| 151 | |
| 25,348 | |
| 3,510 |
December 31, 2025 | |
| 147 | |
| 23,186 | |
| 3,115 |
December 30, 2026 | |
| 114 | |
| 21,048 | |
| 2,789 |
Thereafter | |
| 1,583 | |
| 135,928 | |
| 23,165 |
Total | | $ | 2,184 | | $ | 240,256 | | $ | 37,214 |
Less: imputed interest (1.53% - 4.49%) | |
| (422) | |
| (52,631) | |
|
|
Present value of lease obligations | |
| 1,762 | |
| 187,625 | |
|
|
Less: current maturities | |
| (109) | |
| (20,063) | |
|
|
Noncurrent portion | | $ | 1,653 | | $ | 167,562 | |
|
|
Short-Term Leases
The Company has multiple short-term leases, which have terms of less than 12 months, and thus were excluded from the recognition requirements of Topic 842. The Company has recognized these lease payments in its condensed consolidated statements of income on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments was incurred.
Lessor
The Company is a lessor for certain property, facilities and equipment owned by the Company and leased to others, principally franchisees, under non-cancelable leases with initial terms ranging from three to 20 years. These lease
27
agreements generally provide for a fixed base rent and, in some instances, contingent rent based on a percentage of gross operating profit or net revenues. All leases are considered operating leases.
For the leases in which the Company is the lessor, there are options to extend the lease. However, there are no terms and conditions to terminate the lease, no right to purchase premises and no residual value guarantees. Additionally, there are no related party leases.
The Company received $0.1 million of lease income from company-owned locations for each of the thirteen weeks ended September 28, 2022 and September 29, 2021. The Company received $0.3 million of lease income from company-owned locations for each of the thirty-nine weeks ended September 28, 2022 and September 29, 2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Concerning Forward-Looking Statements
This discussion and analysis should be read in conjunction with Item 1 above and with the consolidated financial statements contained in our annual report on Form 10-K for the year ended December 28, 2016. This discussion and analysis contains forward-looking statements that involveare subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements because they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those that we expected.
While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and assumptions. Outcomes mayit is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of the factors that could cause outcomes to differ materially from our expectations. For moreThese factors include, but are not limited to:
● | the impacts of the ongoing COVID-19 pandemic or another pandemic, epidemic or infectious disease outbreak on our company, our employees, our customers, our partners, our industry and the economy as a whole, as well as our franchisees’ ability to maintain operations in their individual restaurants; |
● | global economic or other business conditions that may affect the desire or ability of our customers to purchase our products such as inflationary pressures, high unemployment levels, increases in gas prices, and declines in median income growth, consumer confidence and consumer discretionary spending; |
● | our ability to open new restaurants in new and existing markets, including difficulty in finding sites and in negotiating acceptable leases; |
● | our ability to compete successfully with other quick-service and fast casual restaurants; |
● | vulnerability to changes in consumer preferences and political and economic conditions; |
● | our ability to attract, develop and retain employees; |
● | vulnerability to conditions in the greater Los Angeles area and to natural disasters given the geographic concentration and real estate intensive nature of our business; |
● | the possibility that we may continue to incur significant impairment of certain of our assets, in particular in our new markets; |
● | changes in food and supply costs, especially for chicken; |
● | social media and negative publicity, whether or not valid, and our ability to respond to and effectively manage the accelerated impact of social media; |
● | our ability to continue to expand our digital business, delivery orders and catering; |
● | concerns about food safety and quality and about food-borne illness, particularly avian flu; |
● | dependence on frequent and timely deliveries of food and supplies and our dependence on a single supplier to distribute substantially all of our products to our restaurants; |
28
● | our ability to service our level of indebtedness; |
● | uncertainty related to the success of our marketing programs, new menu items, advertising campaigns and restaurant designs and remodels; |
● | our reliance on our franchisees, who may incur financial hardships, lose access to credit, close restaurants, or declare bankruptcy, and our limited control over our franchisees and potential liability for their acts; |
● | potential exposure to unexpected costs and losses from our self-insurance programs; |
● | potential obligations under long-term and non-cancelable leases, and our ability to renew leases at the end of their terms; |
● | the impact of any failure of our information technology system or any breach of our network security; |
● | the impact of any security breaches of confidential customer data or personal information in connection with our electronic process of credit and debit card transactions; |
● | our ability to enforce and maintain our trademarks and protect our other proprietary intellectual property; |
● | risks related to government regulation and litigation, including employment and labor laws; and |
● | other risks set forth in our filings with the SEC from time to time, including under Item 1A, Risk Factors in our annual report on Form 10-K for the year ended December 29, 2021, which filings are available online at www.sec.gov. |
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we directcannot assure you tothat we will realize the sections “Risk Factors” (as updated by “PART II-OTHER INFORMATION-Item 1A. Risk Factors.” below) and “Forward-Looking Statements”results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our annual report. We make no guarantees regarding outcomes, and assume no obligations to updateoperations in the ways that we expect. The forward-looking statements herein,included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except pursuantas required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to law.
Overview
El Pollo Loco is a differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken and operates in the limited service restaurant (“LSR”) segment. We believestrive to offer food that we offerintegrates the qualityculinary traditions of food and dining experience typicalMexico with the healthier lifestyle of fast casual restaurants while providing the speed, convenience, and value typical of traditional quick-service restaurants (“QSRs”),Los Angeles, a combination that we call “QSR+“LA-Mex.” and that we believe provides a value-oriented fast casual dining experience. Our distinctive menu features our signature product—citrus-marinatedproduct--citrus-marinated fire-grilled chicken—andchicken--and a variety of Mexican-inspiredMexican and LA-inspired entrees that we create from our chicken. We offer our customers healthier alternatives to traditional food on the go, served by our team members in a colorful, bright, and contemporary restaurant environment. We serve individual and family-sized chicken meals, a variety of Mexican-inspiredMexican and LA-inspired entrees, and sides, and, throughout the year, on a limited-time basis, additional proteins like shrimp, carnitas, and beef.shrimp. Our entrees include favorites such as our Chicken Avocado Burrito, Under 500 CaloriePollo Fit entrees, Ultimatechicken tostada salads, and Pollo BowlBowls. Our famous Creamy Cilantro dressings and Stuffed Chicken Avocado Quesadilla. Our salsas and dressings are prepared fresh daily, allowing our customers to create their favorite flavor profiles to enhance their culinary experience. OurWe believe that our distinctive menu with healthierbetter for you and more affordable alternatives appeals to consumers across a wide variety of socio-economic backgrounds and drives our balanced composition of sales throughout the day (our “day-part mix”), including at lunch and dinner.
Market Trends and Uncertainties
We may face future business disruption and related risks resulting from the ongoing COVID-19 pandemic or from another pandemic, epidemic or infectious disease outbreak, or from broader macroeconomic trends, any of which could have a significant impact on our business. During both thirteen weeks ended September 28, 2022 and September 29, 2021, respectively, we incurred $0.5 million in COVID-19 related expenses, primarily due to leaves of absence. During the thirty-nine weeks ended September 28, 2022 and September 29, 2021, respectively, we incurred $3.1 million and $3.5 million, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. In addition, while all of our restaurants had dining rooms open as of September 28, 2022, we continue to experience staffing challenges, including higher wage inflation, overtime costs and other labor related costs. Labor costs could also be adversely impacted as a result of California Assembly Bill No. 257, the Fast Food Accountability and Standards Recovery Act (“FAST Act”), which was signed into law in September 2022 and authorizes the creation of a council to set minimum standards for industry workers in California, including minimum wages. The FAST Act, currently subject to a referendum campaign, could result in increased labor cost at our California restaurants thereby potentially impacting the profitability of our California restaurants. Further, this bill could prompt similar legislation in other states. Further, we continue to experience inflationary pressures, which resulted in increased commodity prices and impacted our business
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and results of operations during the thirteen and thirty-nine weeks ended September 28, 2022. We expect these pressures to continue during the rest of fiscal 2022.
Due to the fluidity of the COVID-19 pandemic and current macroeconomic environment, we cannot determine the ultimate impact on our condensed consolidated financial condition, liquidity, and future results of operations, and therefore any prediction as to the ultimate materiality of the adverse impact on our condensed consolidated financial condition, liquidity, and future results of operations is uncertain.
Growth Strategies and Outlook
As of September 28, 2022, we had 487 locations in six states. In fiscal 2021, we opened two new company-operated restaurants, one in Nevada and one in California, and our franchisees opened two new restaurants, one in Texas and one in Louisiana. For the thirty-nine weeks ended September 28, 2022, one new company-operated restaurant was opened in Nevada and two new company-operated restaurants were opened in California. For the thirty-nine weeks ended September 28, 2022, seven new franchised restaurants were opened in California. We plan to continue to expand our business, drive restaurant sales growth, and enhance our competitive positioning, by executing on the following strategies:
● | develop a people-first culture; |
● | differentiate the brand; |
● | simplify operations; and |
● | accelerate new restaurant development. |
To increase comparable restaurant sales, we plan to increase customer frequency, attract new customers, and improve per-person spend. These The success of these growth rates areplans is not guaranteed.
Highlights and Trends
Comparable Restaurant Sales
For the thirteen and thirty-nine weeks ended September 27, 2017,28, 2022, system-wide comparable restaurant sales increased 1.7%by 3.8% and 1.5% year over year, respectively.6.3%, respectively, from the comparable period in the prior year. For company-operated restaurants, comparable restaurant sales for the thirteen and thirty-nine weeks ended September 27, 2017,28, 2022 increased by 0.9%3.4% and 1.0%2.9%, respectively. For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of a 1.7%an approximately 7.5% increase in average check size partially offset byand a 0.8% declinedecrease in transactions while year to dateof 4.1% and the year-to-date change in comparable restaurant sales consisted of a 1.9%4.1% decrease in transactions and a 7.0% increase in average check size partially offset by a 0.8% decline in transactions.. For franchised restaurants, comparable restaurant sales increased 2.4%4.1% and 1.8%8.6% for the thirteen and thirty-nine weeks ended September 27, 2017,28, 2022, respectively. Refer to Comparable Restaurant Sales definition in “Key Performance Indicators” section below.
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Restaurant Development
Our restaurant counts at the beginning and end of each of the last three fiscal years and the thirty-nine weeks ended September 27, 2017,28, 2022, were as follows.
Thirty-Nine Weeks Ended | Fiscal Year Ended | ||||||||||
September 27, 2017 | 2016 | 2015 | 2014 | ||||||||
Company-operated restaurant activity: | |||||||||||
Beginning of period | 201 | 186 | 172 | 168 | |||||||
Openings | 12 | 18 | 14 | 11 | |||||||
Restaurant sale to franchisee | — | (1 | ) | — | (6 | ) | |||||
Closures | (5 | ) | (2 | ) | — | (1 | ) | ||||
Restaurants at end of period | 208 | 201 | 186 | 172 | |||||||
Franchised restaurant activity: | |||||||||||
Beginning of period | 259 | 247 | 243 | 233 | |||||||
Openings | 6 | 13 | 5 | 5 | |||||||
Restaurant sale to franchisee | — | 1 | — | 6 | |||||||
Closures | — | (2 | ) | (1 | ) | (1 | ) | ||||
Restaurants at end of period | 265 | 259 | 247 | 243 | |||||||
System-wide restaurant activity: | |||||||||||
Beginning of period | 460 | 433 | 415 | 401 | |||||||
Openings | 18 | 31 | 19 | 16 | |||||||
Closures | (5 | ) | (4 | ) | (1 | ) | (2 | ) | |||
Restaurants at end of period | 473 | 460 | 433 | 415 |
| | | | | | | | |
|
| Thirty-Nine Weeks Ended |
| Fiscal Year Ended | ||||
|
| September 28, 2022 |
| 2021 |
| 2020 |
| 2019 |
Company-operated restaurant activity: | |
| |
| |
| |
|
Beginning of period | | 189 | | 196 | | 195 | | 213 |
Openings | | 3 | | 2 | | 1 | | 2 |
Restaurant sale to franchisee | | — | | (8) | | — | | (16) |
Closures | | (2) | | (1) | | — | | (4) |
Restaurants at end of period | | 190 | | 189 | | 196 | | 195 |
Franchised restaurant activity: | |
| |
| |
| |
|
Beginning of period | | 291 | | 283 | | 287 | | 271 |
Openings | | 7 | | 2 | | 3 | | 2 |
Restaurant sale to franchisee | | — | | 8 | | — | | 16 |
Closures | | (1) | | (2) | | (7) | | (2) |
Restaurants at end of period | | 297 | | 291 | | 283 | | 287 |
System-wide restaurant activity: | |
| |
| |
| |
|
Beginning of period | | 480 | | 479 | | 482 | | 484 |
Openings | | 10 | | 4 | | 4 | | 4 |
Closures | | (3) | | (3) | | (7) | | (6) |
Restaurants at end of period | | 487 | | 480 | | 479 | | 482 |
Restaurant Remodeling
In 2020, we had remodeled 113 company-operated and 196 franchised restaurants, or 309 system-wide, over 75% of our restaurant system due to be remodeled. This includes 8 company-operated and 3 franchised restaurants that have been remodeled using our newestfinalized a new restaurant design called Vision. The Vision design elevatesthat we believe will clearly differentiate and communicate our brand, both on the brand image with exterior and interior featuresinterior. We believe that embrace the brand’s authentic roots with warm textures, rustic elementsour remodels using this new design will result in higher restaurant revenue and a focus onstrengthened brand. During the signature open kitchen layout established in previous designs. Asyear ended September 28, 2022, we have completed four company-operated restaurant remodels and eight franchise remodels using the new asset design. In fiscal 2022, we plan to continue our standard practices for remodels, which includes completing a total of September 27, 2017, includingsix company and 20-30 franchise remodels using the new builds and remodels, we had 33 restaurants open with the Vision design in our system. Remodeling is a use of cash and has implications for our net property and equipment owned and depreciation and amortization line items on our condensed consolidated balance sheets and consolidated statements of operations, among others. design. The cost of our restaurant remodels varies depending on the scope of the work required, but on average the investment is $0.3 million to $0.4 million per restaurant. We believe that our remodeling
Loco Rewards
Our Loco Rewards loyalty program will result in higher restaurant revenue and a strengthened brand.
In addition, customers can earn additional points and free entrées for a variety of engagement activities. As points are available for redemption past the quarter earned, a portion of the revenue associated with the earned points will be deferred until redemption.redemption or expiration. As of September 27, 201728, 2022 and December 29, 2021, the amountrevenue allocated to loyalty points that had not been redeemed was $0.5 million and $0.7 million, respectively, which is reflected in our accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities. We had over 3.1 million loyalty program members as of revenue deferred related to the earned points, netSeptember 28, 2022.
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Critical Accounting Policies and Use of Estimates
The preparation of our condensed consolidated financial statements in accordance with GAAPU.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue, and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances in making judgments about the carrying value of assets and liabilities that
Accounting policies are an integral part of our condensed consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. Management believes that theour critical accounting policies and estimates discussed below involve the most difficult management judgments, due to the sensitivity of the methods and assumptions used. For a summary of our critical accounting policies and a discussion of our use of estimates, see “Critical Accounting Policies and Use of Estimates” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 28, 2016, and Note 2, “Summary of Significant Accounting Policies,” to Item 8, “Financial Statements and Supplementary Data,” in our annual report. For a summary of our significant accounting policies and a discussion of our use of estimates, see also Note 1 to Item 1 above.
There have been no material changes to our critical accounting policies or uses of estimates since our annual report on Form 10-K. However, as discussed in (i) our annual report, in10-K for the aforementioned criticalyear ended December 29, 2021.
Recent Accounting Pronouncements
Recent accounting policies section, “Long-Lived Assets” subsection, and (ii) “Impairment of Long-Lived Assets,” in Note 1 to Item 1 above, we evaluate our assets based on factors including economic conditions and operating performance, and our assumptionspronouncements are subject to change. As described in Note 1, to Item 1 above, we intend to monitor the performance“Basis of Presentation and related future cash flow assumptionsSummary of our Texas portfolio, which could resultSignificant Accounting Policies” in the significant impairment of our assets. In particular, most of our (and our franchisees’) restaurants in Texas have been open since the beginning of 2015, and many since the beginning of 2016. Accordingly, given the difficulty in projecting results for newer restaurants in newer markets, we intendNotes to continue to closely monitor the performance of our Texas portfolio. Based on the most recent results in the Texas market, if our plans to grow sales and improve profitability are not successful, future significant impairment to our assets may occur as a result of the performance of these restaurants and the related future cash flow assumptions over the remaining lease term. The combined carrying values of the restaurants in Texas is $15.6 million as of September 27, 2017. This number only applies to our current company-operated Texas portfolio. Asset impairments outside of Texas, or impairments to new units or future capital expenditures could present additional exposure. Closures could also require additional expenditures. Furthermore, franchised unit closings could result in the loss of franchise revenue and have other adverse effects on us.
Key Financial Definitions
Revenue
Our revenue is derived from twothree primary sources: company-operated restaurant revenue, and franchise revenue, the latter of which is comprised primarily of franchise royalties and, to a lesser extent, franchise fees and sublease rental income.
Food and Paper Costs
Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs are variable in nature, change with sales volume, are impacted by menu mix, and are subject to increases or decreases in commodity costs.
Labor and Related Expenses
Labor and related expenses include wages, payroll taxes, workers’ compensation expense, benefits, and bonuses paid to our restaurant management teams. Like other expense items, we expect labor costs to grow proportionately as our restaurant revenue grows. Factors that influence labor costs include minimum wage and payroll tax legislation, state labor laws (which, in California, may include the FAST Act), overtime, wage inflation, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.
Occupancy Costs and Other Operating Expenses
Occupancy costs include rent, common area maintenance (“CAM”), and real estate taxes. Other restaurant operating expenses include the costs of utilities, advertising, credit card processing fees, restaurant supplies, repairs and maintenance, and other restaurant operating costs.
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General and Administrative Expenses
General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support the development and operations of our restaurants, including compensation and benefits, travel expenses, stock compensation costs, legal and professional fees, and other related corporate costs. Also included are pre-opening costs, and expenses above the restaurant level, including salaries for field management, such as area and regional managers, and franchise field operational support.
Franchise Expenses
Franchise expenses are primarily comprised of rent expenses incurred on properties leased by us and then sublet to franchisees, and expenses incurred in support of franchisee information technology systems.
Depreciation and Amortization
Depreciation and amortization primarily consistconsists of the depreciation of property and equipment, including leasehold improvements and equipment.
Loss on Disposal of Assets
Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.
Impairment and Closed-Store Reserves
We review long-lived assets such as property, equipment, and intangibles on a unit-by-unit basis for impairment when events or circumstances indicate athe carrying value of the assets that may not be recoverable. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values and record an impairment charge when appropriate. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the assetasset’s carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material. Closure costs include non-cash
When we close a restaurant, charges such as up-front expensingwe will evaluate the net presentright of use (“ROU”) asset for impairment, based on anticipated sublease recoveries. The remaining value of unpaid rent remainingthe ROU asset is amortized on a straight-line basis, with the life of a lease offset by assumed sublease income.
Interest Expense, Net
Interest expense, net, consists primarily of interest on our outstanding debt. Debt issuance costs are amortized at cost over the life of the related debt.
Provision for Income Taxes
Provision for income taxes consists of federal and state taxes on our income.
Comparison of Results of Operations
Our operating results for the thirteen weeks ended September 28, 2022 and September 29, 2021 and expressed as percentages of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as percentages of company-operated restaurant revenue, are compared in the tables below.
| | | | | | | | | | | | | | | |
33
|
| Thirteen Weeks Ended | |||||||||||||
| | September 28, 2022 | | September 29, 2021 | | Increase / (Decrease) | |||||||||
|
| ($,000) |
| (%) |
| ($,000) |
| (%) |
| ($,000) |
| (%) | |||
Statements of Income Data | | | | | | | | | | | | | | | |
Company-operated restaurant revenue | | $ | 103,174 |
| 86.0 | | $ | 99,986 |
| 86.4 | | $ | 3,188 |
| 3.2 |
Franchise revenue | |
| 9,543 |
| 8.0 | |
| 8,918 |
| 7.7 | |
| 625 |
| 7.0 |
Franchise advertising fee revenue | |
| 7,161 |
| 6.0 | |
| 6,796 |
| 5.9 | |
| 365 |
| 5.4 |
Total revenue | |
| 119,878 |
| 100.0 | |
| 115,700 |
| 100.0 | |
| 4,178 |
| 3.6 |
Cost of operations | |
|
|
|
| |
|
|
|
| |
|
|
| |
Food and paper costs (1) | |
| 30,163 |
| 29.2 | |
| 26,698 |
| 26.7 | |
| 3,465 |
| 13.0 |
Labor and related expenses (1) | |
| 33,279 |
| 32.3 | |
| 27,802 |
| 27.8 | |
| 5,477 |
| 19.7 |
Occupancy and other operating expenses (1) | |
| 26,920 |
| 26.1 | |
| 25,108 |
| 25.1 | |
| 1,812 |
| 7.2 |
Company restaurant expenses (1) | |
| 90,362 |
| 87.6 | |
| 79,608 |
| 79.6 | |
| 10,754 |
| 13.5 |
General and administrative expenses | |
| 9,855 |
| 8.2 | |
| 9,357 |
| 8.1 | |
| 498 |
| 5.3 |
Franchise expenses | |
| 9,027 |
| 7.5 | |
| 8,545 |
| 7.4 | |
| 482 |
| 5.6 |
Depreciation and amortization | |
| 3,530 |
| 2.9 | |
| 3,685 |
| 3.2 | |
| (155) |
| (4.2) |
Loss on disposal of assets | |
| 21 |
| 0.0 | |
| 83 |
| 0.1 | |
| (62) |
| (74.7) |
Loss on disposition of restaurants | | | — |
| — | |
| 10 |
| 0.0 | |
| (10) |
| N/A |
Impairment and closed-store reserves | |
| 219 |
| 0.2 | |
| 167 |
| 0.1 | |
| 52 |
| 31.1 |
Total expenses | |
| 113,014 |
| 94.3 | |
| 101,455 |
| 87.7 | |
| 11,559 |
| 11.4 |
Income from operations | |
| 6,864 |
| 5.7 | |
| 14,245 |
| 12.3 | |
| (7,381) |
| (51.8) |
Interest expense, net of interest income | |
| 108 |
| 0.1 | |
| 449 |
| 0.4 | |
| (341) |
| (75.9) |
Income tax receivable agreement income | |
| (29) |
| (0.1) | |
| (19) |
| (0.0) | |
| (10) |
| 52.6 |
Income before provision for income taxes | |
| 6,785 |
| 5.7 | |
| 13,815 | | 11.9 | |
| (7,030) |
| (50.9) |
Provision for income taxes | |
| 1,776 |
| 1.5 | |
| 3,654 |
| 3.2 | |
| (1,878) |
| (51.4) |
Net income | | $ | 5,009 |
| 4.2 | | $ | 10,161 |
| 8.7 | | $ | (5,152) |
| (50.7) |
(1) | Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator. All other percentages use total revenue. |
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Our operating results for the thirty-nine weeks ended September 28, 2022 and September 29, 2021 and expressed as percentages of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as a percentage of company-operated restaurant revenue, are compared below.
| | | | | | | | | | | | | | | |
|
| Thirty-Nine Weeks Ended | |||||||||||||
| | September 28, 2022 | | September 29, 2021 | | Increase / (Decrease) | |||||||||
|
| ($,000) |
| (%) |
| ($,000) |
| (%) |
| ($,000) |
| (%) | |||
Statements of Income Data | | | | | | | | | | | | | | | |
Company-operated restaurant revenue | | $ | 303,585 |
| 85.7 | | $ | 301,117 |
| 87.2 | | $ | 2,468 |
| 0.8 |
Franchise revenue | |
| 28,862 |
| 8.2 | |
| 24,919 |
| 7.2 | |
| 3,943 |
| 15.8 |
Franchise advertising fee revenue | |
| 21,590 |
| 6.1 | |
| 19,370 |
| 5.6 | |
| 2,220 |
| 11.5 |
Total revenue | |
| 354,037 |
| 100.0 | |
| 345,406 |
| 100.0 | |
| 8,631 |
| 2.5 |
Cost of operations | |
|
|
|
| |
|
|
|
| |
|
|
| |
Food and paper costs (1) | |
| 89,586 |
| 29.5 | |
| 78,971 |
| 26.2 | |
| 10,615 |
| 13.4 |
Labor and related expenses (1) | |
| 98,966 |
| 32.6 | |
| 90,060 |
| 29.9 | |
| 8,906 |
| 9.9 |
Occupancy and other operating expenses (1) | |
| 76,597 |
| 25.2 | |
| 74,288 |
| 24.7 | |
| 2,309 |
| 3.1 |
Company restaurant expenses (1) | |
| 265,149 |
| 87.3 | |
| 243,319 |
| 80.8 | |
| 21,830 |
| 9.0 |
General and administrative expenses | |
| 29,488 |
| 8.3 | |
| 30,354 |
| 8.8 | |
| (866) |
| (2.9) |
Franchise expenses | |
| 27,315 |
| 7.7 | |
| 24,457 |
| 7.1 | |
| 2,858 |
| 11.7 |
Depreciation and amortization | |
| 10,745 |
| 3.0 | |
| 11,540 |
| 3.3 | |
| (795) |
| (6.9) |
Loss on disposal of assets | |
| 129 |
| 0.0 | |
| 194 |
| 0.1 | |
| (65) |
| (33.5) |
Loss on disposition of restaurants | | | — |
| — | |
| 1,534 |
| 0.4 | |
| (1,534) |
| N/A |
Impairment and closed-store reserves | |
| 598 |
| 0.2 | |
| 1,091 |
| 0.3 | |
| (493) |
| (45.2) |
Total expenses | |
| 333,424 |
| 94.2 | |
| 312,489 |
| 90.5 | |
| 20,935 |
| 6.7 |
Income from operations | |
| 20,613 |
| 5.8 | |
| 32,917 |
| 9.5 | |
| (12,304) |
| (37.4) |
Interest expense, net of interest income | |
| 957 |
| 0.3 | |
| 1,399 |
| 0.4 | |
| (442) |
| (31.6) |
Income tax receivable agreement income | |
| (345) |
| (0.1) | |
| (69) |
| (0.0) | |
| (276) |
| 400.0 |
Income before provision for income taxes | |
| 20,001 |
| 5.6 | |
| 31,587 |
| 9.1 | |
| (11,586) |
| (36.7) |
Provision for income taxes | |
| 5,736 |
| 1.6 | |
| 8,644 |
| 2.5 | |
| (2,908) |
| (33.6) |
Net income | | $ | 14,265 |
| 4.0 | | $ | 22,943 |
| 6.6 | | $ | (8,678) |
| (37.8) |
(1) | Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator. All other percentages use total revenue. |
Company-Operated Restaurant Revenue
For the quarter, company-operated restaurant revenue increased $3.2 million, or 3.2%, from the comparable period in the prior year. The increase in company-operated restaurant sales was primarily due to an increase in company-operated comparable restaurant revenue of $3.3 million, or 3.4%. The company-operated comparable restaurant sales increase consisted of an approximately 7.5% increase in average check size due to increases in menu prices, partially offset by a 4.1% decrease in transactions. In addition, company-operated restaurant revenue was favorably impacted by $0.9 million of additional sales from restaurants opened during or after the third quarter of 2021 and a $0.1 million increase in revenue recognized for our loyalty points program. This company-operated restaurant sales increase was partially offset by a $1.1 million decrease in revenue from the closure of three restaurants during or subsequent to the third quarter of 2021.
Year-to-date, company-operated restaurant revenue increased $2.5 million, or 0.8%, from the comparable period in the prior year. The increase in company-operated restaurant sales was primarily due an increase in company-operated comparable restaurant revenue of $8.3 million, or 2.9%. The company-operated comparable restaurant sales increase consisted of an approximately 7.0% increase in average check size due to increases in menu prices, partially offset by a 4.1% decrease in transactions. In addition, company-operated restaurant revenue was favorably impacted by $1.9 million of additional sales from restaurants opened during or after the third quarter of 2021 and a $0.2 million increase in revenue from restaurants that were temporarily closed due to the COVID-19 pandemic during or subsequent to the third quarter of 2021. This company-operated restaurant sales increase was partially offset by a $5.3 million decrease in revenue from the eight company-operated restaurants sold by the Company to an existing franchisee and a $2.6 million decrease in revenue from the closure of three restaurants, in each case, during or subsequent to the first quarter of 2021.
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Franchise Revenue
For the quarter, franchise revenue increased $0.6 million, or 7.0%, from the comparable period in the prior year. This increase was primarily due to a franchise comparable restaurant sales increase of 4.1%, the opening of nine restaurants and eight company-operated restaurants sold by the Company to an existing franchisee, in each case, during or subsequent to the third quarter of 2021. This franchise revenue increase was partially offset by the closure of two franchise locations during or subsequent to the third quarter of 2021.
Year-to-date, franchise revenue increased $3.9 million, or 15.8%, from the comparable period in the prior year. This increase was primarily due to a franchise comparable restaurant sales increase of 8.6% and the opening of nine restaurants during or subsequent to the third quarter of 2021. The remainder of the franchise revenue increase is attributed to the pass through income related to a corresponding increase in franchise expenses. This franchise revenue increase was partially offset by the closure of three franchise locations during or subsequent to the first quarter of 2021.
Franchise Advertising Fee Revenue
For the quarter, franchise advertising fee revenue increased $0.4 million, or 5.4%, from the comparable period in the prior year. Year-to-date, franchise advertising fee revenue increased $2.2 million, or 11.5%, from the comparable period in the prior year. As advertising fee revenue is a percentage of franchisees’ revenue, the quarter-to-date and year-to-date fluctuations were due to the increases and decreases noted in franchise revenue above.
Food and Paper Costs
For the quarter, food and paper costs increased $3.5 million, or 13.0%, from the comparable period in the prior year, primarily due to a $3.2 million increase in food costs and a $0.3 million increase in paper costs. Year-to-date, food and paper costs increased $10.6 million, or 13.4%, from the comparable period in the prior year, due to a $1.4 million increase in paper costs and a $9.2 million increase in food costs. The increase in food and paper costs for the quarter and year-to-date periods resulted primarily from commodity inflation, partially offset by lower transactions. For the quarter, food and paper costs as a percentage of company-operated restaurant revenue were 29.2%, up from 26.7% in the comparable period of the prior year.
Year-to-date, food and paper costs as a percentage of company-operated restaurant revenue were 29.5%, up from 26.2% in the comparable period of the prior year. The percentage increase for the quarter and year-to-date periods was primarily due to an investment in new elevated packaging, partially offset by an increase in pricing.
Labor and Related Expenses
For the quarter, labor and related expenses increased $5.5 million, or 19.7%, from the comparable period in the prior year. The increase for the quarter was primarily due to recognizing a $3.2 million Employee Retention Credit (“ERC”) which was recorded as an offset to the corresponding payroll tax expense and was classified as part of the labor and other operating expenses on the condensed consolidated statements of income during the thirteen weeks ended September 29, 2021. Further, the increase for the quarter was impacted by a $2.1 million increase primarily related to minimum wage increases in California during fiscal 2022 and other labor wage increases as a result of competitive pressures, a $1.0 million increase in other labor related expenses primarily related to overtime and payroll taxes and a $0.4 million increase from restaurants opened during or after the third quarter of the prior year and. The increase in labor and related expenses for the quarter was partially offset by a $0.8 million decrease related to the 4.1% decrease in year-over-year transactions and a $0.4 million decrease in worker’s compensation expense.
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Year-to-date, labor and related expenses increased $8.9 million, or 9.9%, from the comparable period in the prior year. The increase for the year-to-date period was due to a $6.2 million increase related to higher minimum wage increases in California during fiscal 2022 and other labor wage increases as a result of competitive pressures, a $1.3 million increase in overtime, $0.8 million in higher payroll taxes, a $0.7 million increase from restaurants opened during or after the third quarter of the prior year and a $1.1 million increase in other labor related expenses primarily related to training. Further, the increase for the year-to-date period was primarily due to recognizing a $3.2 million ERC which was recorded as an offset to the corresponding payroll tax expense and was classified as part of the labor and other operating expenses on the condensed consolidated statements of income during the thirty-nine weeks ended September 29, 2021. The increase in labor and related expenses for the year-to-date period was partially offset by a $2.0 million reduction in labor related to the eight locations sold to an existing franchisee during the prior year, a $1.8 million decrease related to the 4.1% decrease in year-over-year transactions and a $0.6 million decrease in worker’s compensation expense.
For the quarter, labor and related expenses as a percentage of company-operated restaurant revenue were 32.3%, up from 27.8% in the comparable period in the prior year due to the cost increases highlighted above, partially offset by the higher menu prices. Year-to-date labor and related expenses as a percentage of company-operated restaurant revenue were 32.6%, up from 29.9% in the comparable period in the prior year. The year-to-date percentage was impacted by the cost increases highlighted above, partially offset by an increase in menu pricing.
Occupancy and Other Operating Expenses
For the quarter, occupancy and other operating expenses increased $1.8 million, or 7.2%, from the comparable period in the prior year. The increase was primarily due to a $0.7 million increase in utilities, a $0.2 million increase in repairs and maintenance, a $0.2 million increase in market place delivery fees, a $0.2 million increase in occupancy costs and a $0.5 million increase in other operating supplies.
Year-to-date, occupancy and other operating expenses increased $2.3 million, or 3.1%, from the comparable period in the prior year. The increase was primarily due to a $1.6 million increase in utilities, a $0.5 million increase in market place delivery fees, a $0.3 million increase in repairs and maintenance and a $0.4 million increase in other operating expenses. The increase in occupancy and other operating expenses was partially offset by a $0.3 million decrease in occupancy costs and a $0.2 million decrease in operating services and supplies.
For the quarter, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 26.1%, up from 25.1% in the comparable period. Year-to-date, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.2%, up from 24.7% in the comparable period of the prior year. Both the quarter and year-to-date increases resulted from cost increases highlighted above.
General and Administrative Expenses
For the quarter, general and administrative expenses increased $0.5 million, or 5.3%, from the comparable period in the prior year. The increase for the quarter was primarily due to a $0.4 million increase in recruiting and training costs.
Year-to-date, general and administrative expenses decreased $0.9 million, or 2.9%, from the comparable period in the prior year. The decrease for the year-to-date period was due primarily to a $0.5 million decrease in labor related costs, primarily related to a decrease in estimated management bonus expense and a $0.5 million decrease in legal and outside professional services. This decrease was partially offset by a $0.1 million increase in professional services.
For the quarter, general and administrative expenses as a percentage of total revenue were 8.2%, up from 8.1% in the comparable period of the prior year. Year-to-date, general and administrative expenses as a percentage of total revenue were 8.3%, down from 8.8% in the comparable period of the prior year. The percentage increase for the quarterly period is primarily due to the cost increases discussed above. The percentage decrease for the year-to-date period is primarily due to the cost decreases noted above.
Loss on Disposition of Restaurants
During the thirteen and thirty-nine weeks ended September 29, 2021, we completed the sale of our eight restaurants within the Sacramento area to an existing franchisee. This sale resulted in cash proceeds of $4.6 million and a net loss on
37
sale of restaurants of less than $0.1 million and $1.5 million for the thirteen and thirty-nine weeks ended September 29, 2021, respectively.
Impairment and Closed-Store Reserves
During the thirteen and thirty-nine weeks ended September 28, 2022, we recorded non-cash impairment charges of $0.1 million and $0.4 million, respectively, primarily related to the long-lived assets of one restaurant in California. During the thirteen and thirty-nine weeks ended September 29, 2021, we recorded non-cash impairment charges of $0.1 million and $0.7 million, respectively, primarily related to the carrying value of the ROU assets of one restaurant in Texas closed in 2019, the ROU assets of one restaurant in California, and the long-lived assets of three restaurants in California. Given the inherent uncertainty in projecting results for newer restaurants in newer markets we are monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis. For these restaurants, if expected performance is not realized, an impairment charge may be recognized in future periods, and such charge could be material.
When a restaurant is closed, we will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense. Additionally, any property tax and CAM payments relating to closed restaurants are included within closed-store expense. During the thirteen and thirty-nine weeks ended September 28, 2022, we recognized $0.1 million and $0.2 million, respectively, of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations. During the thirteen and thirty-nine weeks ended September 29, 2021, we recognized $0.1 million and $0.4 million, respectively, of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.
Interest Expense, Net
For the quarter, interest expense, net, decreased $0.3 million from the comparable period in the prior year. For the year-to-date period, interest expense, net, decreased $0.4 million from the comparable period in the prior year. Both the quarter and year-to-date decreases in interest expense were primarily related to the unwinding of our interest rate swap and the corresponding payout that was recognized as part of interest income during the thirteen and thirty-nine weeks ended September 28, 2022 and lower outstanding balances on our 2022 Revolver (as defined below).
Income Tax Receivable Agreement
On July 30, 2014, we entered into the income tax receivable agreement (the “TRA”). The TRA calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our net operating losses (“NOLs”) and other tax attributes attributable to preceding periods. For the thirteen and thirty-nine weeks ended September 28, 2022, we recorded income tax receivable agreement income of less than $0.1 million and $0.3 million, respectively, and for both the thirteen and thirty-nine weeks ended September 29, 2021 we recorded income tax receivable agreement income of less than $0.1 million.
Provision for Income Taxes
For the quarter ended September 28, 2022, we recorded an income tax provision of $1.8 million, reflecting an estimated effective tax rate of 26.2%. For the quarter ended September 29, 2021, we recorded an income tax provision of $3.7 million, reflecting an estimated effective tax rate of approximately 26.4%. For the year-to-date period ended September 28, 2022, we recorded an income tax provision of $5.7 million, reflecting an estimated effective tax rate of approximately 28.7%. For the year-to-date ended September 29, 2021, we recorded an income tax provision of $8.7 million, reflecting an estimated effective tax rate of approximately 27.4%.
The difference between the 21.0% statutory rate and our effective tax rate of 28.7% for the year-to-date ended September 28, 2022 is primarily a result of state taxes, the change in valuation allowance against certain state credits, a tax shortfall related to non-deductible executive compensation, partially offset by a Work Opportunity Tax Credit benefit.
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To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company-operated restaurant revenue, system-wide sales, comparable restaurant sales, company-operated average unit volumes, restaurant contribution, restaurant contribution margin, new restaurant openings, EBITDA, and Adjusted EBITDA.
System-Wide Sales
System-wide sales are neither required by, nor presented in accordance with GAAP. System-wide sales are the sum of company-operated restaurant revenue and sales from franchised restaurants. Our total revenue in our condensed consolidated statements of income is limited to company-operated restaurant revenue and franchise revenue from our franchisees. Accordingly, system-wide sales should not be considered in isolation or as a substitute for our results as reported under GAAP. Management believes that system-wide sales are an important figure for investors, because they are widely used in the restaurant industry, including by our management, to evaluate brand scale and market penetration.
The following table reconciles system-wide sales to company-operated restaurant revenue and total revenue:
| | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended | ||||||||
(Dollar amounts in thousands) | | September 28, 2022 | | September 29, 2021 | | September 28, 2022 | | | September 29, 2021 | |||
Company-operated restaurant revenue | | $ | 103,174 | | $ | 99,986 | | $ | 303,585 | | $ | 301,117 |
Franchise revenue | | | 9,543 | | | 8,918 | |
| 28,862 | |
| 24,919 |
Franchise advertising fee revenue | | | 7,161 | | | 6,796 | |
| 21,590 | |
| 19,370 |
Total Revenue | | | 119,878 | | | 115,700 | |
| 354,037 | |
| 345,406 |
Franchise revenue | | | (9,543) | | | (8,918) | |
| (28,862) | |
| (24,919) |
Franchise advertising fee revenue | | | (7,161) | | | (6,796) | | | (21,590) | | | (19,370) |
Sales from franchised restaurants | | | 159,742 | | | 151,657 | |
| 481,351 | |
| 432,752 |
System-wide sales | | $ | 262,916 | | $ | 251,643 | | $ | 784,936 | | $ | 733,869 |
Company-Operated Restaurant Revenue
Company-operated restaurant revenue consists of sales of food and beverages in company-operated restaurants net of promotional allowances, employee meals, and other discounts. Company-operated restaurant revenue in any period is directly influenced by the number of operating weeks in such period, the number of open restaurants, and comparable restaurant sales.
Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced January and December traffic and higher in the second and third quarters. As a result of seasonality, our quarterly and annual results of operations and key performance indicators such as company-operated restaurant revenue and comparable restaurant sales may fluctuate.
Comparable Restaurant Sales
Comparable restaurant sales reflect year-over-year sales changes for comparable company-operated, franchised, and system-wide restaurants. A restaurant enters our comparable restaurant base the first full week after it has operated for fifteen months. Comparable restaurant sales exclude restaurants closed during the applicable period. At September 27, 201728, 2022 and September 28, 2016,29, 2021, there were 423466 and 410462 comparable restaurants, 179184 and 170189 company-operated restaurants and 244282 and 240273 franchised restaurants, respectively. Comparable restaurant sales indicate the performance of existing restaurants, since new restaurants are excluded.
Comparable restaurant sales growth can be generated by an increase in the number of meals sold and/or by increases in the average check amount, resulting from a shift in menu mix and/or higher prices resulting from new products or price increases.
Restaurant Contribution and Restaurant Contribution Margin
Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution is defined as company-operated restaurant revenue less company restaurant expenses
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which includes food and paper cost, labor and related expenses and occupancy and other operating expenses, where applicable. Restaurant contribution excludes certain costs, such as general and administrative expenses, depreciation and amortization, impairment and closed-store reserve and other costs that are considered normal operating costs and, accordingly, restaurant contribution is not indicative of overall Company results and does not accrue directly to the benefit of stockholders because of the exclusion of certain corporate-level expenses. Restaurant contribution margin is defined as restaurant contribution as a percentage of net company-operated restaurant revenue.
Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our restaurants, and our calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation, or superior to, or as substitutes for the analysis of our results as reported under GAAP. Management believes that restaurant contribution and restaurant contribution margin are important tools for investors, because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance. Management uses restaurant contribution and restaurant contribution margin as key metrics to evaluate the profitability of incremental sales at our restaurants, to evaluate our restaurant performance across periods, and to evaluate our restaurant financial performance compared with our competitors.
A reconciliation of restaurant contribution and restaurant contribution margin to company-operated restaurant revenue is provided below:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
(Dollar amounts in thousands) | September 27, 2017 | September 28, 2016 | September 27, 2017 | September 28, 2016 | |||||||||||
Company-operated restaurant revenue | $ | 94,982 | $ | 89,738 | $ | 287,316 | $ | 268,984 | |||||||
Company restaurant expenses | 77,607 | 70,984 | 229,366 | 211,982 | |||||||||||
Restaurant contribution | $ | 17,375 | $ | 18,754 | $ | 57,950 | $ | 57,002 | |||||||
Restaurant contribution margin (%) | 18.3 | % | 20.9 | % | 20.2 | % | 21.2 | % |
| | | | | | | | | | | | | | | |
|
| Thirteen Weeks Ended | | | Thirty-Nine Weeks Ended | |
| ||||||||
(Dollar amounts in thousands) |
| September 28, 2022 |
| September 29, 2021 |
| | September 28, 2022 |
| September 29, 2021 |
|
| ||||
| | | | | | | | | | | | | | | |
Restaurant contribution: | | | | | | | | | | | | | | | |
Income from operations | | $ | 6,864 | | $ | 14,245 | | | $ | 20,613 | | $ | 32,917 | | |
Add (less): | |
| | |
| | | |
| | |
| | | |
General and administrative expenses | |
| 9,855 | |
| 9,357 | | |
| 29,488 | |
| 30,354 | | |
Franchise expenses | |
| 9,027 | |
| 8,545 | | |
| 27,315 | |
| 24,457 | | |
Depreciation and amortization | |
| 3,530 | |
| 3,685 | | |
| 10,745 | |
| 11,540 | | |
Loss on disposal of assets | |
| 21 | |
| 83 | | |
| 129 | |
| 194 | | |
Loss on disposition of restaurants | | | — | | | 10 | | | | — | | | 1,534 | | |
Franchise revenue | |
| (9,543) | |
| (8,918) | | |
| (28,862) | |
| (24,919) | | |
Franchise advertising fee revenue | |
| (7,161) | |
| (6,796) | | |
| (21,590) | |
| (19,370) | | |
Impairment and closed-store reserves | |
| 219 | |
| 167 | | |
| 598 | |
| 1,091 | | |
Restaurant contribution | | $ | 12,812 | | $ | 20,378 | | | $ | 38,436 | | $ | 57,798 | | |
| | | | | | | | | | | | | | | |
Company-operated restaurant revenue: | |
|
| |
|
| | |
|
| |
|
| | |
Total revenue | | $ | 119,878 | | $ | 115,700 | | | $ | 354,037 | | $ | 345,406 | | |
Less: | |
|
| |
|
| | |
|
| |
|
| | |
Franchise revenue | |
| (9,543) | |
| (8,918) | | |
| (28,862) | |
| (24,919) | | |
Franchise advertising fee revenue | |
| (7,161) | |
| (6,796) | | |
| (21,590) | |
| (19,370) | | |
Company-operated restaurant revenue | | $ | 103,174 | | $ | 99,986 | | | $ | 303,585 | | $ | 301,117 | | |
| | | | | | | | | | | | | | | |
Restaurant contribution margin (%) | |
| 12.4 | % |
| 20.4 | % | |
| 12.7 | % |
| 19.2 | % | |
New Restaurant Openings
The number of restaurant openings reflects the number of new restaurants opened by us and our franchisees during a particular reporting period. Before a new restaurant opens, we and our franchisees incur pre-opening costs, as described below. New restaurants often open with an initial start-up period of higher than normal sales volumes, which subsequently decrease to stabilized levels. New restaurants typically experience normal inefficiencies in the form of
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higher food and paper, labor, and other direct operating expenses and, as a result, restaurant contribution margins are generally lower during the start-up period of operation. The average start-up period after which our new restaurants’ revenue and expenses normalize is approximately fourteen weeks. When we enter new markets, we may be exposed to start-up times and restaurant contribution margins that are longer and lower than reflected in our average historical experience.
EBITDA and Adjusted EBITDA
EBITDA represents net income before interest expense, provision for income taxes, depreciation, and amortization. Adjusted EBITDA represents net income before interest expense, provision for income taxes, depreciation, amortization, and other items that we do not consider representative of our on-going operating performance, as identified in the reconciliation table below.
EBITDA and Adjusted EBITDA as presented in this report are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income, or any other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA. Our presentation of EBITDA and
EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our on-going operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.
We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.
We believe that EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses)NOLs) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally for a number of benchmarks, including to compare our performance to that of our competitors and for compensation performance benchmarks.competitors.
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The following table sets forth reconciliations of our net income to our EBITDA and Adjusted EBITDA to our net (loss) income:
| | | | | | | | | | | | | |
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||||||
(Amounts in thousands) |
| September 28, 2022 |
| September 29, 2021 |
| September 28, 2022 |
| September 29, 2021 |
| ||||
Net income | | $ | 5,009 | | $ | 10,161 | | $ | 14,265 | | $ | 22,943 | |
Non-GAAP adjustments: | |
| | |
| | |
| | |
| | |
Provision for income taxes | |
| 1,776 | |
| 3,654 | |
| 5,736 | |
| 8,644 | |
Interest expense, net of interest income | |
| 108 | |
| 449 | |
| 957 | |
| 1,399 | |
Depreciation and amortization | |
| 3,530 | |
| 3,685 | |
| 10,745 | |
| 11,540 | |
EBITDA | | $ | 10,423 | | $ | 17,949 | | $ | 31,703 | | $ | 44,526 | |
Stock-based compensation expense (a) | |
| 1,009 | |
| 1,042 | |
| 2,806 | |
| 2,936 | |
Loss on disposal of assets (b) | |
| 21 | |
| 83 | |
| 129 | |
| 194 | |
Loss on disposition of restaurants (c) | | | — | | | 10 | | | — | | | 1,534 | |
Impairment and closed-store reserves (d) | |
| 219 | |
| 167 | |
| 598 | |
| 1,091 | |
Income tax receivable agreement income (e) | |
| (29) | |
| (19) | |
| (345) | |
| (69) | |
Securities class action legal expense (f) | |
| (10) | |
| (415) | |
| 443 | |
| 256 | |
Legal settlements (g) | | | (541) | | | — | | | (541) | | | — | |
Special legal expenses (h) | | | 350 | | | — | | | 350 | | | — | |
Pre-opening costs (i) | |
| 131 | |
| 36 | |
| 280 | |
| 220 | |
Adjusted EBITDA | | $ | 11,573 | | $ | 18,853 | | $ | 35,423 | | $ | 50,688 | |
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||
(Amounts in thousands) | September 27, 2017 | September 28, 2016 | September 27, 2017 | September 28, 2016 | |||||||||||
Net (loss) income | $ | (4,039 | ) | $ | 5,211 | $ | 8,657 | $ | 17,921 | ||||||
Non-GAAP adjustments: | |||||||||||||||
(Benefit) provision for income taxes | (2,457 | ) | 2,830 | 5,254 | 11,930 | ||||||||||
Interest expense, net of interest income | 903 | 785 | 2,471 | 2,441 | |||||||||||
Depreciation and amortization | 4,697 | 4,074 | 13,646 | 11,796 | |||||||||||
EBITDA | $ | (896 | ) | $ | 12,900 | $ | 30,028 | $ | 44,088 | ||||||
Stock-based compensation expense(a) | 324 | 105 | 738 | 244 | |||||||||||
Loss on disposal of assets(b)(c) | 65 | 58 | 724 | 524 | |||||||||||
Expenses related to fire loss(c) | — | — | — | 48 | |||||||||||
Loss (gain) on recovery of insurance proceeds, property, equipment and expenses(c) | — | 148 | — | (741 | ) | ||||||||||
Recovery of securities lawsuits related legal expense(d) | (634 | ) | — | (1,145 | ) | — | |||||||||
Asset impairment and closed-store reserves(e) | 16,038 | 2,490 | 17,293 | 2,624 | |||||||||||
Loss (gain) on disposition of restaurants(f) | — | 5 | — | (28 | ) | ||||||||||
Income tax receivable agreement (income) expense(g) | (19 | ) | 182 | 107 | 411 | ||||||||||
Securities lawsuits related legal expense(h) | 933 | 519 | 2,341 | 2,327 | |||||||||||
Pre-opening costs(i) | 429 | 918 | 1,526 | 1,775 | |||||||||||
Executive transition costs(j) | — | — | 271 | — | |||||||||||
Adjusted EBITDA | $ | 16,240 | $ | 17,325 | $ | 51,883 | $ | 51,272 |
(a) | Includes non-cash, stock-based compensation. |
(b) | Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment. |
(c) |
During the thirteen and thirty-nine weeks ended September |
(d) | Includes costs related to impairment of long-lived and ROU assets and closing restaurants. During the thirteen and thirty-nine weeks ended September 28, |
During the thirteen and thirty-nine weeks ended September 29, 2021, we recorded non-cash impairment charges of $0.1 million and $0.7 million, respectively, primarily related to the carrying value of the ROU assets of one restaurant in Texas closed in 2019, the ROU assets of one restaurant in California, and the long-lived assets of three restaurants in California.
During the thirteen and thirty-nine weeks ended September 28, 2022, we recognized $0.1 million and $0.2 million, respectively, of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations. During the thirteen and thirty-nine weeks ended September 29, 2021, we recognized $0.1 million and $0.4 million, respectively, of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.
(e) | |
On July 30, 2014, we entered into the TRA. This agreement calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our |
(f) | |
Consists of costs and recoveries related to the defense of securities lawsuits. |
(g) | Includes $0.5 million received from legal settlement, net of legal expenses. |
(h) | Consists of costs related to a special dividend declaration. On October 11, 2022, the Board of Directors declared a special dividend of $1.50 per share on the common stock of the Company. |
(i) | Pre-opening costs are a component of general and administrative expenses, and consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including management labor costs, staff labor costs during training, food and supplies used during training, marketing costs, and other related pre-opening costs. These are generally incurred over the three to five months prior to opening. Pre-opening costs also include occupancy costs incurred between the date of possession and the opening date for a restaurant. |
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Thirteen Weeks Ended | ||||||||||||||||||||
September 27, 2017 | September 28, 2016 | Increase / (Decrease) | ||||||||||||||||||
Statements of Operations Data | ($ ,000) | (%) | ($ ,000) | (%) | ($ ,000) | (%) | ||||||||||||||
Company-operated restaurant revenue | $ | 94,982 | 93.9 | $ | 89,738 | 93.7 | $ | 5,244 | 5.8 | |||||||||||
Franchise revenue | 6,173 | 6.1 | 6,078 | 6.3 | 95 | 1.6 | ||||||||||||||
Total revenue | 101,155 | 100 | 95,816 | 100 | 5,339 | 5.6 | ||||||||||||||
Cost of operations | ||||||||||||||||||||
Food and paper costs(1) | 27,851 | 29.3 | 26,960 | 30.0 | 891 | 3.3 | ||||||||||||||
Labor and related expenses(1) | 27,514 | 29.0 | 24,455 | 27.3 | 3,059 | 12.5 | ||||||||||||||
Occupancy and other operating expenses(1) | 22,242 | 23.4 | 20,071 | 22.4 | 2,171 | 10.8 | ||||||||||||||
Gain on recovery of insurance proceeds, lost profit(1) | — | — | (502 | ) | (0.6 | ) | 502 | (100.0 | ) | |||||||||||
Company restaurant expenses(1) | 77,607 | 81.7 | 70,984 | 79.1 | 6,623 | 9.3 | ||||||||||||||
General and administrative expenses | 8,285 | 8.2 | 8,252 | 8.6 | 33 | 0.4 | ||||||||||||||
Franchise expenses | 709 | 0.7 | 797 | 0.8 | (88 | ) | (11.0 | ) | ||||||||||||
Depreciation and amortization | 4,697 | 4.6 | 4,074 | 4.3 | 623 | 15.3 | ||||||||||||||
Loss on disposal of assets | 65 | 0.1 | 58 | 0.1 | 7 | 12.1 | ||||||||||||||
Loss on recovery of insurance proceeds, property, equipment and expenses | — | — | 148 | 0.2 | (148 | ) | (100.0 | ) | ||||||||||||
Recovery of securities lawsuits related legal expenses | (634 | ) | (0.6 | ) | — | — | (634 | ) | N/A | |||||||||||
Asset impairment and closed-store reserves | 16,038 | 15.9 | 2,490 | 2.6 | 13,548 | 544.1 | ||||||||||||||
Total expenses | 106,767 | 105.5 | 86,803 | 90.6 | 19,964 | 23.0 | ||||||||||||||
(Loss) gain on disposition of restaurants | — | — | (5 | ) | 0.0 | 5 | (100.0 | ) | ||||||||||||
(Loss) income from operations | (5,612 | ) | (5.5 | ) | 9,008 | 9.4 | (14,620 | ) | (162.3 | ) | ||||||||||
Interest expense, net of interest income | 903 | 0.9 | 785 | 0.8 | 118 | 15.0 | ||||||||||||||
Income tax receivable agreement (income) expense | (19 | ) | 0.0 | 182 | 0.2 | (201 | ) | (110.4 | ) | |||||||||||
(Loss) income before (benefit) provision for income taxes | (6,496 | ) | (6.4 | ) | 8,041 | 8.4 | (14,537 | ) | (180.8 | ) | ||||||||||
(Benefit) provision for income taxes | (2,457 | ) | (2.4 | ) | 2,830 | 3.0 | (5,287 | ) | (186.8 | ) | ||||||||||
Net (loss) income | $ | (4,039 | ) | (4.0 | ) | $ | 5,211 | 5.4 | $ | (9,250 | ) | (177.5 | ) | |||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||
September 27, 2017 | September 28, 2016 | Increase / (Decrease) | ||||||||||||||||||
Statement of Operations Data | ($ ,000) | (%) | ($ ,000) | (%) | ($ ,000) | (%) | ||||||||||||||
Company-operated restaurant revenue | $ | 287,316 | 93.7 | $ | 268,984 | 93.5 | $ | 18,332 | 6.8 | |||||||||||
Franchise revenue | 19,183 | 6.3 | 18,660 | 6.5 | 523 | 2.8 | ||||||||||||||
Total revenue | 306,499 | 100.0 | 287,644 | 100.0 | 18,855 | 6.6 | ||||||||||||||
Cost of operations | ||||||||||||||||||||
Food and paper costs(1) | 84,069 | 29.3 | 80,760 | 30.0 | 3,309 | 4.1 | ||||||||||||||
Labor and related expenses(1) | 80,939 | 28.2 | 73,323 | 27.3 | 7,616 | 10.4 | ||||||||||||||
Occupancy and other operating expenses(1) | 64,358 | 22.4 | 58,401 | 21.7 | 5,957 | 10.2 | ||||||||||||||
Gain on recovery of insurance proceeds, lost profit(1) | — | — | (502 | ) | (0.2 | ) | 502 | (100 | ) | |||||||||||
Company restaurant expenses(1) | 229,366 | 79.8 | 211,982 | 78.8 | 17,384 | 8.2 | ||||||||||||||
General and administrative expenses | 27,594 | 9.0 | 25,776 | 9.0 | 1,818 | 7.1 | ||||||||||||||
Franchise expenses | 2,532 | 0.8 | 2,960 | 1.0 | (428 | ) | (14.5 | ) | ||||||||||||
Depreciation and amortization | 13,646 | 4.5 | 11,796 | 4.1 | 1,850 | 15.7 | ||||||||||||||
Loss on disposal of assets | 724 | 0.2 | 524 | 0.2 | 200 | 38.2 | ||||||||||||||
Expenses related to fire loss | — | — | 48 | 0.0 | (48 | ) | (100.0 | ) | ||||||||||||
Gain on recovery of insurance proceeds, property, equipment and expenses | — | — | (741 | ) | (0.3 | ) | 741 | (100.0 | ) | |||||||||||
Recovery of securities lawsuits related legal expenses | (1,145 | ) | (0.4 | ) | — | — | (1,145 | ) | N/A | |||||||||||
Asset impairment and closed-store reserves | 17,293 | 5.6 | 2,624 | 0.9 | 14,669 | 559.0 | ||||||||||||||
Total expenses | 290,010 | 94.6 | 254,969 | 88.6 | 35,041 | 13.7 | ||||||||||||||
Gain on disposition of restaurants | — | — | 28 | 0.0 | (28 | ) | (100.0 | ) | ||||||||||||
Income from operations | 16,489 | 5.4 | 32,703 | 11.4 | (16,214 | ) | (49.6 | ) | ||||||||||||
Interest expense, net of interest income | 2,471 | 0.8 | 2,441 | 0.8 | 30 | 1.2 | ||||||||||||||
Income tax receivable agreement expense | 107 | 0.0 | 411 | 0.1 | (304 | ) | (74.0 | ) | ||||||||||||
Income before provision for income taxes | 13,911 | 4.5 | 29,851 | 10.4 | (15,940 | ) | (53.4 | ) | ||||||||||||
Provision for income taxes | 5,254 | 1.7 | 11,930 | 4.1 | (6,676 | ) | (56.0 | ) | ||||||||||||
Net income | $ | 8,657 | 2.8 | $ | 17,921 | 6.2 | $ | (9,264 | ) | (51.7 | ) |
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources have been cash provided from operations, cash and cash equivalents, and our secured revolving credit facility. Our primary requirements for liquidity and capital are new restaurants, existing restaurant capital investments (remodels and maintenance), legal defense costs, lease obligations, interest payments on our debt, lease obligations, and working capital and general corporate needs. Our working capital requirements are not significant, since our customers pay for their purchases in cash or by payment card (credit or debit) at the time of sale. Thus, we are able to sell many of our inventory items before we have to pay our suppliers for them.suppliers. Our restaurants do not require significant inventories or receivables. We believe that these sources of liquidity and capital are sufficient to finance our continued operations, and expansion plansincluding planned capital expenditures, for at least the next 12 months.
The following table presents summary cash flow information for the periods indicated.
Thirty-Nine Weeks Ended | |||||||
(Amounts in thousands) | September 27, 2017 | September 28, 2016 | |||||
Net cash provided (used) by | |||||||
Operating activities | $ | 52,210 | $ | 39,670 | |||
Investing activities | (28,295 | ) | (24,257 | ) | |||
Financing activities | (19,021 | ) | (14,985 | ) | |||
Net increase in cash | $ | 4,894 | $ | 428 |
| | | | | | | |
|
| Thirty-Nine Weeks Ended |
| ||||
(Amounts in thousands) |
| September 28, 2022 |
| September 29, 2021 |
| ||
Net cash provided by (used in) | | |
| | |
| |
Operating activities | | $ | 21,907 | | $ | 42,332 | |
Investing activities | |
| (13,022) | |
| (8,143) | |
Financing activities | |
| (19,656) | |
| (22,739) | |
Net increase (decrease) in cash | | $ | (10,771) | | $ | 11,450 | |
Operating Activities
For the thirty-nine weeks ended September 27, 2017,28, 2022, net cash provided byfrom operating activities increasedchanged by approximately $12.5$20.4 million from the comparable period of the prior year. This change was due primarily to higher profitability after non-cash items and favorableunfavorable working capital fluctuations.
Investing Activities
For the thirty-nine weeks ended September 27, 2017,28, 2022, net cash used byin investing activities increasedchanged by $4.0$4.9 million from the comparable period of the prior year. This change was due primarily to opening 12 new companythe Company receiving a deposit of $4.6 million on the sale of eight restaurants and seven remodels completed inwithin the Sacramento area during the thirty-nine weeks ended September 27, 2017 compared to 10 new restaurants and one remodel completed in29, 2021.
Financing Activities
For the thirty-nine weeks ended September 28, 2016, as well as insurance proceeds related to fire damage and proceeds from the sale of a restaurant received in the prior year period.
Debt and Other Obligations
The Company, as a guarantor, is a party to a credit agreement with(the “2022 Credit Agreement”) among EPL, as borrower, Intermediate, as a guarantor, Bank of America, N.A., as administrative agent, swingline lender, and letter of credit issuer, the lenders party thereto, and the other parties thereto, which provides for a $150.0 million five-year senior secured revolving credit facility (the “2022 Revolver”). The 2022 Revolver, which is available pursuant to the 2014 Revolver. The 2014 Revolver2022 Credit Agreement, includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. At September 27, 2017, $8.1 million of letters of credit were outstandingThe 2022 Revolver and $106.9 million was available to borrow under the revolving line of credit. The 2014 Revolver2022 Credit Agreement will mature on July 27, 2027. The obligations under the 2022
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Credit Agreement and related loan documents are guaranteed by Holdings and Intermediate. The obligations of Holdings, EPL and Intermediate under the 2022 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.
The special dividend announced by the Company’s Board of Directors on October 11, 2022 is permitted under the terms of 2022 Revolver pursuant to both subclause (iii)(d) and (iii)(e) of the preceding sentence. Under the 2022 Revolver, Holdings is restricted from making certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $1.0 million per year to repurchase or about December 11, 2019.
Borrowings under the 2014 Revolver2022 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBORthe secured overnight financing rate (“SOFR”) or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate ofpublished Bank of America prime rate, or (c) LIBORTerm SOFR with a term of one-month SOFR plus 1.00%. For LIBORTerm SOFR loans, the margin is in the range of 1.75%1.25% to 2.50%2.25%, and for base rate loans the margin is in thea range of 0.75%0.25% to 1.50%1.25%. Borrowings under the 2022 Revolver may be repaid and reborrowed. The interest rate range was 2.96%2.87% to 2.99%6.00% and 2.44%1.35% to 2.99%6.00% for the thirteen and thirty-nine weeks ended September 27, 2017,28, 2022, respectively, and 2.20%1.34% to 2.27%1.35% and 2.02%1.34% to 2.27%1.65% for the thirteen and thirty-nine weeks ended September 29, 2021, respectively.
The 2022 Credit Agreement contains certain financial covenants. We were in compliance with the financial covenants as of September 28, 2022.
At September 28, 2022, $10.0 million of letters of credit and $20.0 million of borrowings were outstanding under the 2022 Revolver. There were $120.0 million remaining borrowings available under the 2022 Revolver at September 28, 2022.
During the year ended December 25, 2019, we entered into an interest rate swap with a notional amount of $40.0 million, related to the outstanding borrowings under our 2018 Revolver (defined below). The interest rate swap was designated as a cash flow hedge and effectively converted a portion of our outstanding borrowings to a fixed rate of 1.31%, plus the applicable margin spread, which was 1.5% for the thirty-nine weeks ended September 28, 2016, respectively.
During the thirty-nine weeks ended September 28, 2022, we refinanced and financial covenants, including,terminated our credit agreement (the “2018 Credit Agreement”) among others, the following (all subject to certain exceptions): a maximum lease-adjusted consolidated leverage ratio covenant, a minimum consolidated fixed charge coverage ratio, and limitations on indebtedness, liens, investments, asset sales, mergers, consolidations, liquidations, dissolutions, restricted payments, and negative pledges. The 2014 Revolver also includes certain customary affirmative covenants and events of default. We were in compliance with all such covenants at September 27, 2017.
Material Cash Requirements
Our material cash requirements as of equity interests in connection with the exercise of stock options by directors and officers, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (c) make up to $5.0 million in other restricted payments per year, and (d) make other restricted payments, provided that such payments would not cause, in each case, on a pro forma basis, (x) its lease-adjusted consolidated leverage ratio to equal or exceed 4.25 times and (y) its consolidated fixed charge coverage ratio to be less than 1.75 times.
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Share Repurchase Program and Subsequent Borrowings
On October 11, 2022, our Board of Directors approved a share repurchase program under which the fourth quarterCompany is authorized to repurchase up to $20.0 million of 2017shares of our Common Stock. The repurchase program will terminate on March 28, 2024, may be modified, suspended or discontinued at any time, and does not obligate us to acquire any particular number of shares.
In addition, on October 11, 2022, our Board of Directors declared a special dividend of $1.50 per share on our common stock. The special dividend is payable on November 9, 2022, to stockholders of record, including holders of restricted stock and restricted stock units, at the close of business on October 24, 2022.
Lastly, on November 3, 2022, we anticipate making a TRAborrowed $46.0 million on our 2022 Revolver and outstanding borrowings as of November 3, 2022 were $66.0 million. After payment of the special dividend, we are expected to have approximately $11.0$10.0 million to our pre-IPO stockholders.
Interest Rate Risk
On July 27, 2022, we refinanced the 2018 Revolver and entered into the 2022 Credit Agreement, which provides for a $150 million five-year senior secured revolving facility. In connection with the refinancing, the 2018 Credit Agreement was terminated. We are exposed to market risk from changes in the interest raterates on our debt, which bears interest, at USD LIBORsecured overnight financing rate (“SOFR”) plus a margin between 1.75%1.25% and 2.50%2.25%. As of September 27, 2017,28, 2022, we had outstanding borrowings of $85.0$20.0 million and another $8.1under our 2022 Revolver, $10.0 million of letters of credit in support of our insurance programs. A 1.0%programs, and the applicable margin on outstanding borrowings under 2022 Revolver was 1.5%. We effectively did not have any long-term debt subject to variations in interest rates as of September 28, 2022 as a one percent increase in the effectivevariable rate of interest rate applied to these borrowings would not result in a pre-taxmaterial increase in annual interest expense.
On July 29, 2022, we made a $20.0 million payment to the 2022 Revolver and the outstanding balance as of September 28, 2022 was $20.0 million. Borrowings under the 2022 Credit Agreement (other than any swingline loans) bear interest, at the borrowers’ option, at rates based upon either “SOFR” or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. If future rates based upon SOFR are higher than SOFR rates as currently determined, we may experience potential increases in interest rates on our variable rate debt, which could adversely impact our interest expense, increaseresults of $0.9 million on an annualized basis.
In connection with our entry into the 2022 Credit Agreement, we terminated the interest rate risk through normal operating and financing activities and,swap previously used to hedge interest rate risk. In settlement of this swap, we received approximately $0.6 million. The remaining amount in AOCI related to the hedging relationship will be reclassified into earnings when determined appropriate, through the use of derivative financial instruments.
Inflation
Inflation has an impact on food, paper, construction, utility, labor and benefits, general and administrative, and other costs, all of which can materially impact our operations. We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal, state, or local minimum wage, and increases in the minimum wage will increase our labor costs. In general, we have been able to substantially offset cost increases resulting from inflation by increasing menu prices, managing menu mix, improving productivity, or making other adjustments. We may not be able to offset cost increases in the future.
Commodity Price Risk
We are exposed to market price fluctuation in food product prices. Given the historical volatility of certain of our food product prices, including chicken, other proteins, grains, produce, dairy products, and cooking oil, these fluctuations can
45
materially impact our food and beverage costs. While our purchasing commitments partially mitigate the risk of such fluctuations, there is no assurance that supply and demand factors such as disease or inclement weather will not cause the prices of the commodities used in our restaurant operations to fluctuate. In periods when the prices of commodities drop, we may pay higher prices under our purchasing commitments. In rapidly fluctuating commodities markets, it may prove difficult for us to adjust our menu prices in accordance with input price fluctuations. Therefore, to the extent that we do not pass along cost increases to our customers, our results of operations may be adversely affected. At this time, we do not use financial instruments to hedge our commodity risk.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the required time periods specified in the SEC’s rules and designed to ensureforms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Our disclosure controls and procedures are based on assumptions about the likelihood of future events, and even effective disclosure controls and procedures can only provide reasonable assurance of achieving their objectives. Because of their inherent limitations, we cannot guarantee that our disclosure controls and procedures will succeed in achieving their stated objectives in all cases, that they will be complied with in all cases, or that they will prevent or detect all misstatements.
Our management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
No changes in our internal control over financial reporting occurred during the period covered by this reportquarter ended September 28, 2022 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
46
Item 1. Legal Proceedings.
For information regarding material legal proceedings, see Note 7, “Commitments and Contingencies—Legal Matters” in the Superior Court of the State of California, County of Orange, under the caption
There have been no material changes from the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 28, 2016,29, 2021 filed with the SEC on March 11, 2022, except for (i) the addition of the risk factors that immediately follow, and (ii) the revision of the risk factors that follow them, which are revisedimmediately follow.
Matters relating to employment and restated in their entirety.
Various federal, state and local labor laws govern our Presidentrelationships with our employees and Chief Executive Officer, informedaffect operating costs. These laws include employee classifications as exempt or non-exempt, minimum wage requirements, unemployment tax rates, workers’ compensation rates, citizenship requirements, and other wage and benefit requirements for employees classified as non-exempt. Significant additional government regulations and new laws mandating increases in minimum wages or benefits such as health insurance could materially affect our board that he intends to retire on or before December 31, 2017,business, financial condition, operating results, and cash flow. In particular, our labor and regulatory compliance costs could be adversely impacted as a result of California Assembly Bill No. 257, the Fast Food Accountability and Standards Recovery Act (“FAST Act”), which was signed into law in September 2022. The FAST Act, currently subject to a referendum campaign, authorizes the Company hiring his replacement. At this time, Mr. Sather retains his positions whilecreation of a searchcouncil to set minimum standards for his successor is underway. As Presidentworkers in the industry, including for wages, working hours, and CEO, Mr. Sather is responsible forother health and safety conditions. The implementation of the general supervisionFAST Act could result in increased labor cost at our California restaurants thereby potentially impacting the profitability of our business. TurnoverCalifornia restaurants. Further, this bill could prompt similar legislation in other states. In addition, the CEO positionunionization of our employees and of the employees of our franchisees could lead to operational or strategic uncertainty or inefficiency, or increased turnover among managers and executives, or among employees generally, affecting our operations and performance. Such effects could occur before Mr. Sather retires, after his successor’s tenure begins, and during any gap between the two. Similarly, a new CEO may require time to become familiar withmaterially affect our business, financial condition, operating results, and during this period hiscash flow.
Employee claims against us or her lack of familiarity with our organization could pose an impediment to the efficient operation of our business and the development and execution of our business strategy. We are not guaranteed to be able to find a replacement with suitable skills and personality promptly and for an amount of compensation that we consider appropriate. Compensation for a new CEO may include equity grants, which may result in dilution to shareholders. Any successor may be less effective than Mr. Sather, or change our Company’s direction, and any such changes could be disruptive or unsuccessful. Additionally, any retirement agreements that we may enter into with Mr. Sather may provide certain compensation or benefits that may be material, but we have not yet resolved the terms of such agreements, if any.
If we or our franchisees face labor shortages or increased labor costs, our results of operations and cash flow.
Labor is a primary component in the cost of operating our company-operated and franchised restaurants. Labor shortages and increased labor costs are subject to increasing proximity among our restaurantsnumerous internal and dueexternal factors, including higher employee-turnover rates, changes in immigration policy including barriers to market saturation.
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Federally-mandated, state-mandated, or locally-mandated minimum wages have recently increased in several jurisdictions, including the State of California and Texas,Los Angeles County, and may not be recoverable. As a result, we recorded a $8.3 million expense related to the impairment of the assets of the nine restaurants. In addition, during the thirty-nine weeks ended September 27, 2017, the Company recorded a non-cash impairment charge of $15.5 million primarily related to the assets of nine restaurants in Texas and two restaurants in California, and a non-cash closed-store reserve of $1.8 million related to the closure of four restaurants in Texas and one in Arizona. We continue to monitor the recoverability of the carrying value of the assets of several other restaurants. In particular, most of the Company’s (and its franchisees’) restaurants in Texas have been open since the beginning of 2015, and many since the beginning of 2016. Accordingly, given the difficulty in projecting results for newer restaurants in newer markets, the Company intends to continue to monitor the performance of its Texas portfolio. Based on the most recent resultsfurther raised in the Texas market, if management's plans to grow sales and improve profitability are not successful, future, significant impairment to the Company’s assets may occurincluding as a result of the performance of these restaurants and the relatedFAST Act in California. We may be unable to sufficiently increase our menu prices in order to pass future cash flow assumptions over the remaining lease term. The combined carrying values of the restaurants in Texas is $15.6 million as of September 27, 2017. This number only appliesincreased labor costs on to our current company-operated Texas portfolio. Asset impairments outsidecustomers, in which case our margins would be negatively affected. Also, reduced margins of Texas, or impairments to new units or future
If the ownership of our common stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest.
As of September 28, 2022, Trimaran Pollo Partners, L.L.C. (“LLC”), owns approximately 43.3%30.2% of our outstanding common stock. This large position means that LLC and its majority owners-predecessorsowners—which are predecessors and affiliates of, and certain funds managed by, Trimaran Capital Partners and Freeman Spogli & Co. (collectively, “Trimaran” and “Freeman Spogli,” respectively)-possess)—possess significant influence when stockholders vote on matters such as election of directors, mergers, consolidations and acquisitions, the sale of all or substantially all of our assets, decisions affecting our capital structure, amendments to our certificate of incorporation or our by-laws, and our winding up and dissolution. So longIn addition, as LLC maintains at least 40% ownership, (i) any member of September 28, 2022, certain affiliates of Freeman Spogli & Co., FS Equity Partners V, L.P. and FS Affiliates V, L.P. (“Freeman Spogli”), own collectively approximately 14.9% of our outstanding common stock, which they received in August 2022 following a distribution by the board of directors may be removed at any time without cause by affirmative voteLLC of a majorityportion of its shares to Freeman Spogli.
Further, two of our common stock, and (ii) stockholders representing 40% or greater ownership may cause special stockholder meetings to be called. Currently, three of our eighteleven directors, including our chairman, are affiliated with Trimaran orand one of our directors is affiliated with Freeman Spogli.
Issuer Purchases of Equity Securities
During the thirteen weeks ended September 28, 2022, the Company acquired shares of its common stock held by its employees to satisfy tax withholding obligations in connection with the vesting of previously issued restricted stock. The number of shares of common stock acquired and the average price paid per share for each month in the third quarter ended September 28, 2022 are as discussed aboveshown in (i) Part I, Item 1, Note 1, “Basis of Presentation”, and (ii) Part I, Item 2, “Liquidity and Capital Resources - Debt and Other Obligations - New Credit Agreement”, our 2014 Revolver limits payment of dividends.
| | | | | | |
| | Total Number of | | Average Price | | |
| | Shares Purchased | | Paid Per Share | | |
June 30, 2022 to July 27, 2022 |
| — | | $ | — |
|
July 28, 2022 to August 24, 2022 |
| 2,584 | | $ | 9.32 |
|
August 25, 2022 to September 28, 2022 |
| — | | $ | — |
|
Total |
| 2,584 | | $ | 9.32 |
|
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Exhibit Index
Number | Description | Filed Herewith | Form | Period Ended | Exhibit | Filing Date | SEC File Number |
| | | | | | | |
3.1 | Amended and Restated Certificate of Incorporation of El Pollo Loco Holdings, Inc. | | 10-Q | 6/25/2014 | 3.1 | 9/5/2014 | 001-36556 |
| | | | | | | |
3.2 | Amended and Restated By-Laws of El Pollo Loco Holdings, Inc. | | 10-Q | 6/25/2014 | 3.2 | 9/5/2014 | 001-36556 |
| | | | | | | |
10.1 | | 8-K | | 10.1 | 6/21/2022 | 001-36556 | |
| | | | | | | |
10.2 | Employment Agreement, dated June 28, 2022, between El Pollo Loco Holdings, Inc. and Ira Fils | | 8-K | | 10.1 | 7/1/2022 | 001-36556 |
| | | | | | | |
10.3 | | 8-K | | 10.1 | 8/2/2022 | 001-36556 | |
| | | | | | | |
10.4 | X | | | | | | |
| | | | | | | |
31.1 | Certification of Chief Executive Officer under section 302 of the Sarbanes–Oxley Act of 2002 | X | | | | | |
| | | | | | | |
31.2 | Certification of Chief Financial Officer under section 302 of the Sarbanes–Oxley Act of 2002 | X | | | | | |
| | | | | | | |
32.1 | * | | | | | | |
| | | | | | | |
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | | | | | |
| | | | | | | |
101.SCH | XBRL Taxonomy Extension Schema Document | X | | | | | |
| | | | | | | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | | | | | |
| | | | | | | |
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101.DEF | |||||||
XBRL Taxonomy Extension Definition Linkbase Document | X | | | | | | |
| | | | | | | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | | | | | |
| | | | | | | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | | | | | |
| | | | | | | |
104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document | X | | | | | |
* | |
Pursuant to Item 601(b)(32)(ii) of Regulation S-K (17 C.F.R. § 229.601(b)(32)(ii)), this certification is deemed furnished, not filed, for purposes of section 18 of the Exchange Act, nor is it otherwise subject to liability under that section. It will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except if the registrant specifically incorporates it by reference. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ||
El Pollo Loco Holdings, Inc. | ||
| | (Registrant) |
| | |
Date: November | | /s/ |
| | Laurance Roberts |
| | President and Chief Executive Officer |
| | (duly authorized officer) |
Date: November | | /s/ |
| | Ira Fils |
| | Chief Financial Officer |
| | (principal financial officer) |
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