Item 1. Business
Company Overview
Its Bo Time!
Bojangles is a highly differentiated and growing restaurant operator and franchisor dedicated to serving customers high-quality, craveable food made from
our Southern recipes. Since 1977, we believe Bojangles has become an iconic brand with a cult-like following due to our famous, made-from-scratch biscuits baked every 20 minutes, our fresh,
never-frozen
bone-in
fried chicken, our unique fixins and our Legendary Iced Tea. We believe we offer fast-casual quality food combined with quick-service speed, convenience and value. While we serve our full menu of
craveable food across all dayparts, we are especially known by customers for our breakfast offerings and generated, on average, approximately $650,000 in fiscal 2016 per company-operated restaurant before 11:00 a.m. In fiscal 2016, our 309
company-operated and 407 franchised restaurants, primarily located in the Southeastern United States, generated over $1.2 billion in system-wide sales, representing $504.7 million in company restaurant revenues and $727.2 million in
franchise sales which contributed $27.2 million in franchise royalty and other franchise revenues. Over this same period, our restaurants generated a system-wide AUV of over $1.8 million, which we believe is among the highest in the
quick-service restaurant (QSR) and fast-casual segments. Our mission is to win the hearts of our customers by delivering quality and service all day, every day, and we believe our passionate team members and culture are fundamental to
our success. The excitement for our brand and enthusiasm of our customers can be best summarized by our famous tagline
Its Bo Time!
Since our founding in Charlotte, North Carolina in 1977, our core menu centered on chicken n biscuits has remained largely unchanged. We
believe our variety of fresh, flavorful and Southern-inspired items appeals to a broad customer demographic across our five dayparts: breakfast, lunch, snack, dinner and after dinner. Bojangles is known for its breakfast menu, which is served
all day, every day, and includes our top selling Cajun Filet Biscuit. We also offer hand-breaded,
bone-in
chicken marinated for at least 12 hours, Chicken Supremes, Homestyle Chicken Tenders and sandwiches, as
well as unique fixins including our Seasoned Fries,
Bo-Tato
Rounds, Cajun Pintos and Dirty Rice. Our
Bo-Smart
menu features items such as salads, grilled chicken
sandwiches, roasted chicken bites and
fat-free
green beans. In addition to our individual menu items, we offer combos and family meals that appeal to large parties, as well as our Big Bo Box, which is perfect
for tailgating events. Our food is complemented by our Legendary Iced Tea that is steeped the
old-fashioned
way, providing a rich flavor that our customers crave. Our high-quality, handcrafted food also
represents a great value with an average check of only $7.08 for company-operated restaurants in fiscal 2016. We believe our distinct menu with fresh, made-from-scratch offerings combined with a compelling average check creates an attractive value
proposition for our customers.
Our Industry
The
U.S. restaurant industry is divided into two segments: full service and limited service. Full service is comprised of the casual dining,
mid-scale
and fine dining
sub-segments.
We operate within the limited service segment (LSR), which is comprised of the QSR and fast-casual
sub-segments.
QSRs are defined by Technomic
as traditional fast-food restaurants with average check sizes of
$3.00-$8.00.
Fast-casual is defined by Technomic as a limited or self-service format with average check sizes of
$8.00-$12.00
that offers food prepared to order within a generally more upscale and developed establishment. Our restaurants combine elements of both QSRs and fast-casual restaurants. Our restaurants
convenient locations and format, drive-thru service and average check are attributes that we share with QSRs (rather than with the fast-casual segment generally), while the quality of our food, the freshness of our ingredients and our traditional
cooking methods (as opposed to utilizing microwaves) are attributes that we generally share with fast-casual restaurants.
According to Technomic, 2015
sales for the total LSR category increased 5.2% from 2014 to $255 billion. We offer fast-casual quality food combined with quick-service speed, convenience and value across multiple
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dayparts. According to Technomic, sales for the total QSR segment grew 4.1% from 2014 to $212 billion in 2015, and are projected to grow to $254 billion by 2019, representing a
compounded annual growth rate (CAGR) of 4.6%. Total sales in the fast-casual segment grew 11.3% from 2014 to $43 billion in 2015, and are projected to grow to $64 billion by 2019, representing a CAGR of 10.2%. We believe our
differentiated, high-quality menu, including our extensive breakfast offerings that deliver great value all day, every day, positions us to compete successfully against both QSR and fast-casual concepts, providing us with a large addressable market.
We believe that we are well-positioned to benefit from a number of culinary and demographic trends in the United States:
Growing Breakfast Daypart
: According to NPD CREST
®
, total morning meal dollars
grew from $57 billion for the year ended September 2010 to $75 billion for the year ended September 2016, representing a CAGR of 4.6%. In addition, sales for the QSR morning meal daypart grew from $39 billion for the year ended
September 2010 to $56 billion for the year ended September 2016, representing a CAGR of 6.1%. Several factors are driving growth in the breakfast daypart, including more extensive menu offerings and consumers desire for value, portability
and convenience. Consumers breakfast eating habits tend to be more habitual than other meals because breakfast is part of many consumers morning routines.
Increasing Chicken Category
: In 2015, the chicken menu category for LSRs grew 8.2% from 2014, outpacing the broader LSR category,
according to Technomic.
Population Growth in Our Markets
: Since 2000, population growth in our key markets has exceeded the U.S.
national average. According to the U.S. Census Bureau, growth in the Georgia, North Carolina, South Carolina, Virginia and Tennessee populations from 2000 to 2016 was on average 22.1%, as compared to 14.5% population growth in the U.S. over that
same period.
The Bo Difference
We
believe the following strengths differentiate us and serve as the foundation for our continued growth:
Iconic Brand with Loyal,
Cult-Like Following
. Since opening our first restaurant in North Carolina in 1977, we believe we have become an iconic brand with a cult-like following by consistently delivering differentiated, craveable food. We believe our Bo
Fanatics, which is our term for our most loyal customers, visit us multiple times per week and promote our brand through word of mouth and engagement on social media. We support our brand through high profile sponsorships of sporting events
and venues, such as the Bojangles Southern 500, as well as endorsements from celebrities who are fans of Bojangles. We believe our iconic brand and cult-like following have driven our 27 consecutive quarters of system-wide comparable
restaurant sales growth and support our ability to grow our restaurant base in existing and new markets.
High-Quality, Craveable
Food.
We are committed to maintaining the integrity of our traditional, Southern food. We believe our customers crave the unique flavor of our food and the variety of our menu, which includes our signature breakfast biscuits,
bone-in
fried chicken, Chicken Supremes, Homestyle Chicken Tenders, sandwiches, unique fixins, and our
Bo-Smart
menu. We use high-quality ingredients prepared the
old-fashioned
way and do not have microwaves in our restaurants. As an example of our commitment to quality, all of our specially trained biscuit makers follow 48 steps in preparing our made-from-scratch, buttermilk
biscuits, which are baked fresh every 20 minutes. We prepare eggs, sausage and cured country ham on the griddle for our breakfast menu served all day. For our unique fixins, we prepare our famous Dirty Rice and Cajun Pintos on the
stove-top,
and our Seasoned Fries are made with our special blend of seasonings. Finally, we steep our Legendary Iced Tea to ensure a rich brewed flavor that our customers crave. This commitment to offering
high-quality food with unique flavor that we believe customers cannot find at other restaurants has earned us deep customer loyalty and a high frequency of visits.
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Diversified Daypart Mix.
We have a diversified daypart mix that supports AUVs that are
among the highest in the QSR and fast-casual segments:
Our Famous Breakfast:
While many of our competitors do not offer breakfast,
in fiscal 2016, we generated 37% of our company restaurant revenues before 11:00 a.m., or an average of approximately $650,000 annually per company-operated restaurant. Our strong breakfast results make us a leader in an attractive daypart in the
industry. Furthermore, we believe breakfast has broad customer appeal and is the most habitual daypart, which drives repeat business and customer loyalty.
Our Craveable Menu for Lunch, Snack, Dinner and After Dinner:
In fiscal 2016, we generated 63% of our company restaurant revenues from
11:00 a.m. to closing, which is typically 10:00 p.m. We believe Bojangles menu, focused on high-quality, craveable items, is distinct in the LSR industry and provides an attractive value proposition for lunch, snack, dinner and after dinner.
Our Big Bo Box, family and tailgate meals cater to group occasions and drive sales during these dayparts. Additionally, our customers can order our famous breakfast items all day, which we believe differentiates us from our peers and delivers great
value at all hours.
Unique Value Proposition: Fast-Casual Quality Food with QSR Speed, Convenience and Value.
Everything we do is
driven by our intense focus on delivering a compelling value proposition to our customers. We believe that our concept combines elements of both fast-casual restaurants (quality and food preparation) and QSR (speed, convenience and value). Our
value proposition is a key element of our long track record of delivering strong comparable restaurant sales and successful market expansion:
High-Quality Ingredients
: We cook our food using high-quality ingredients. For example, our menu features our famous biscuits, which are
made from fresh buttermilk, and our
bone-in
fried chicken, which is fresh and
never-frozen.
Our menu also includes items such as our Country Ham Biscuit made from
traditionally
dry-cured
country ham and our Sausage Biscuit made from high-quality sausage with a blend of seasonings prepared especially for Bojangles. Our Legendary Iced Tea is steeped the
old-fashioned
way and is never made from concentrates or poured from bottles or cans.
Traditional
Food Preparation
: We prepare our food the
old-fashioned
way, and never in a microwave. Our restaurant kitchens are specifically designed for our employees to prepare our food in a traditional manner; for
example, our
bone-in
chicken is hand-breaded and is marinated for at least 12 hours. Many of our menu items are made-from-scratch and are cooked in the oven, on the griddle or on the
stove-top.
Compelling Speed and Convenience
: We locate our restaurants in places that are easily
accessible and convenient to customers homes, places of work and daily commutes. We also strive to deliver our food quickly to our customers, whether in our restaurants or through our drive-thru. We believe our customers appreciate our speed
and convenience, as evidenced by approximately 80% of our company restaurant revenues in fiscal 2016 generated via drive-thru and
carry-out.
Attractive Price Point
: Our average check was $7.08 for company-operated restaurants in fiscal 2016. We believe this average check is
lower than any fast-casual and most QSR restaurant concepts.
Compelling Hybrid System that Provides Capital Efficient Growth.
Our
hybrid system captures the earnings power of a company-operated model with strong economics and the capital efficiency of a franchised model. As of December 25, 2016, 43% of our restaurant base was company-operated and 57% was franchised.
Company-Operated
: As of December 25, 2016 we had 309 company-operated restaurants, which has grown from 196 as of the end of fiscal
2011, representing a CAGR of 9.5%. In fiscal 2016, our company-operated restaurants generated $504.7 million in revenues, which increased from $281.9 million in fiscal 2011. This sales growth contributed to our restaurant contribution
increase from $44.3 million in fiscal 2011 to $94.9 million in fiscal 2016, representing a CAGR of 16.4%. With approximately 43% of the restaurant base operated by the company, we are aligned with our
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franchisees and take a leadership role in executing brand and operational initiatives. Our company-operated restaurants have achieved strong performance, thereby illustrating to franchisees the
potential of our brand and generating significant credibility within our franchise base.
Franchised
: As of December 25, 2016,
our franchisees operated 407 restaurants, which has grown from 312 as of fiscal 2011, representing a CAGR of 5.5%. Royalties and franchise fees totaled $27.2 million in fiscal 2016, which increased from $18.0 million in fiscal 2011. We
believe royalties and fees generated from our franchise base provide us with significant, predictable cash flow to invest in executing our strategies. Our approximately 90 franchise entities are important partners in our system-wide growth as they
allow us to expand the Bojangles brand in new and existing markets in a capital efficient manner.
Highly Productive Restaurant
Base with Strong Unit Economics
. We believe our differentiated customer value proposition generates strong restaurant-level financials and attractive returns on investment. For fiscal 2016, our system-wide AUV was over $1.8 million, which
we believe is among the highest in the QSR and fast-casual segments. Our new company-operated restaurant model targets strong cash flows and compelling
cash-on-cash
returns. Unlike some other restaurant concepts, we primarily utilize
build-to-suit
developments and equipment financing leases for our new company-operated restaurants,
which requires minimal upfront investment for construction and equipment costs. Our new company-operated restaurant model is based on a year one target AUV of $1.5 million, as well as restaurant-level cash flow of approximately $110,000 and
average upfront cash equipment investment of approximately $85,000 for locations under
build-to-suit
and equipment financing leases. Given our
build-to-suit
and equipment financing lease strategy that minimizes our upfront cash investment, our new company-operated restaurant model delivers, on average, a less than
one-year
payback on cash investment for these locations, which we are able to assess once the restaurant has been open for a full twelve months. On average, we have exceeded this
one-year
payback on cash investment target for our new company-operated restaurants utilizing a
build-to-suit
and equipment
financing lease strategy that were opened during fiscal years 2011-2015. We believe that our strong productivity, attractive restaurant-level financials and low cash investment provide a platform for continued profitable company growth and
compelling returns on our new restaurants. See Construction for more information.
Strong Management Team Driving
Culture Based on People.
We have a highly experienced management team with approximately 381 years of cumulative experience in the restaurant industry, as of the date hereof. Our leadership team is committed to instilling our strong culture,
which is based on trust, servant leadership and total commitment in all that we do. Our values of hard work, teamwork, harmony, listening and respect underlie everything that we do, both in our interactions with each other and with customers. We
view our restaurant-level employees as the true heroes of our business, working daily to deliver our high-quality food with a strong sense of pride in our brand. We believe our strong management team and commitment to a culture based on people and
integrity are key drivers of our success as a differentiated restaurant concept and position us well for long-term growth.
Spreading the
Bo-Buzz
We plan to pursue the following strategies to continue to grow our revenues and profits:
Continue to Open New Company-Operated and Franchised Restaurants.
We believe we are in the early stages of our growth story. We have
expanded our system-wide restaurant count from 508 restaurants as of the end of fiscal 2011 to 716 restaurants as of the end of fiscal 2016, representing a CAGR of 7.1%. In fiscal 2016, we opened 29 company-operated restaurants and 29 franchised
restaurants, contributing to annual system-wide unit growth of 8.2%. Over the long term, we plan to continue growing the number of Bojangles system-wide restaurants by approximately 7% to 8% annually, while maintaining a similar proportion of
company-operated and franchised units. Given the strength of our brand, existing restaurant base and new unit economics, we believe we can continue opening restaurants in our core North Carolina and South Carolina markets. Additionally, given the
performance of our approximately 275 company-
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operated and franchised restaurants in adjacent markets as of December 25, 2016, we believe there is a significant opportunity to continue to grow in our existing footprint. Based on our
experience and research conducted for us by Buxton, we believe the total restaurant potential in our current footprint of eleven states is more than 1,400 locations, and across the United States we believe the total restaurant potential is more than
3,500 locations.
Drive Comparable Restaurant Sales.
We have generated 27 consecutive quarters of system-wide comparable restaurant
sales growth through the fourth fiscal quarter ended December 25, 2016. We plan to continue delivering comparable restaurant sales growth through the following strategies:
Attract New Customers Through Expanded Brand Awareness
: We expect to attract new customers as Bojangles becomes more widely known
due to new restaurant openings and marketing efforts focused on broadening the reach and appeal of our brand. We expect consumers will become more familiar with Bojangles as we continue to penetrate our markets, which we believe will benefit
our existing restaurant base. Our marketing strategy centers on our Its Bo Time campaign, which highlights the craveability and made-from-scratch quality of our food. We also utilize social media community engagement and public
relations to increase the reach of our brand. Additionally, our system will benefit from increased contributions to our marketing and various
co-op
advertising funds as we continue to grow our restaurant base.
Increase Existing Customer Frequency:
We are striving to increase customer frequency by providing
Bo-Size
Service, a service experience and environment that compliments the quality of our food and models our culture. We expect to accomplish this by enhancing customer engagement,
while also improving throughput, order execution and quality. Additionally, in early fiscal 2014 we began implementing a customer experience measurement system, which provides us with real-time feedback and customers insights to enhance our
service experience. Recently, we also announced that we will be strategically adding labor initiatives, such as table service and more full-time versus part-time team members, where we believe it will significantly enhance the customer service
experience over time. We believe that always striving for excellent customer service will create an experience and environment that will support increased existing customer visits.
Continue to Grow Dayparts:
We believe we have an opportunity to complement our strong breakfast daypart with our lunch, snack, dinner
and after dinner dayparts. We expect to drive growth across these dayparts through optimized labor and management allocation, enhanced menu offerings, innovative merchandising and marketing campaigns, such as our Big Bo Box packaging and Tailgate
Everything campaign, which have successfully driven growth in our post-breakfast dayparts over time. We plan to continue introducing and marketing limited time offers to increase occasions across our dayparts as well as to educate customers on our
lunch and dinner offerings.
Leverage Technology.
We are investing in new technology, such as our new
point-of-sale
system, XPIENT, which will allow us to enhance efficiency and throughput in our restaurants. Currently, XPIENT has been installed in all of our
company-operated restaurants. Additionally, we are working on several other key initiatives, including mobile payment, online ordering and a customer loyalty program, which we believe will improve our customer experience, capture large group
ordering and increase transactions.
Continue to Enhance Profitability
. We focus on expanding our profitability over the long term
while also investing in personnel, technology and infrastructure to support our future growth. We will seek to further enhance our long-term margins by maintaining fiscal discipline and leveraging fixed costs. We constantly focus on restaurant-level
operations, including cost controls, while ensuring that we do not sacrifice the quality and service for which we are known. Additionally, as our restaurant base grows, we believe we will be able to leverage support costs over the long term as
general and administrative expenses grow at a slower rate than our revenues.
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Our Food
Our Menu
Our core menu is centered on
chicken n biscuits and has remained largely unchanged since 1977. We believe we offer craveable, Southern-inspired food with unique flavor that customers cannot find at other restaurants. We prepare our food using high-quality
ingredients with many of our items made-from-scratch, and we do not permit microwave ovens in any of our restaurants, ever. Our menu includes our famous, made-from-scratch, buttermilk biscuits baked fresh every 20 minutes; our fresh,
never-frozen
bone-in
fried chicken; our unique fixins; our
Bo-Smart
menu featuring items such as salads, grilled chicken
sandwiches, roasted chicken bites and
fat-free
green beans; our freshly baked and delicious sweets menu; and our Legendary Iced Tea. Our goal is that every menu item at Bojangles has a unique or special
flavor that differentiates our restaurants and our brand.
Our food is offered a la carte and in combos which may be favorably priced compared to
individual orders. A Bojangles customer may order a single piece of chicken or one of our chicken dinners with a choice of our unique fixins, and always accompanied by a made-from-scratch, fresh buttermilk biscuit. Our chicken,
fixins, biscuits and Legendary Iced Tea may also be ordered in boxes or family meals, and larger combinations may be offered as tailgate specials or may be packaged in our iconic Big Bo Box. The addition of boxes, family meals and tailgate
specials to our menu has helped increase our dinner and
carry-out
business, resulting in a higher average check and comparable restaurant sales growth.
Breakfast
We are especially known for our
breakfast offering, which is served all day, every day. Each morning, our specially trained and certified biscuit makers begin preparing our made-from-scratch biscuits, which are made using fresh buttermilk and flour. Biscuit sandwiches are
typically
made-to-order
with combinations of chicken, ham, sausage, cheese, eggs, gravy and other fillings. Our Cajun Filet Biscuit is our most popular biscuit sandwich,
featuring our marinated chicken filet with special Cajun-inspired seasonings. For our ham biscuits, we use
dry-cured
country ham that is rubbed with salt, sugar and other ingredients and then cured for 90 days
and our steak biscuits are made with breaded chopped steak. We also offer limited-time-only biscuit sandwiches utilizing the same made-from-scratch biscuit platform, including our grilled pork chop biscuit. To complement our biscuits, many customers
choose our
Bo-Tato
Rounds, which are mini seasoned hash browns fried to a golden brown, and our BoTown Roasters coffee.
Below are just a few of our breakfast biscuits served all day, every day:
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Cajun Filet
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Country Ham
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Sausage
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Steak
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Gravy
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Lunch, Snack, Dinner and After Dinner
Our menu centers on our fresh,
never-frozen,
bone-in
chicken and a variety of
unique fixins. Our
bone-in
chicken is marinated for at least 12 hours, and then hand-dipped and breaded before cooking. In addition to our
bone-in
chicken, we
offer our Chicken Supremes and our Homestyle Chicken Tenders, which have a milder flavor profile, both of which are made with boneless whole breast chicken select tenderloin.
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To accompany our chicken, we offer our famous fixins including our Dirty Rice and Cajun Pintos which are
cooked on the
stove-top.
For our Dirty Rice, we use sausage made to our specification using our exclusive blend of seasonings, and our Cajun Pintos are prepared using our exclusive ranchero style seasonings.
Our Seasoned Fries are
skin-on,
entrée fries which are sprinkled with our special seasoning blend. In addition, we offer Southern style mac n cheese made from two cheeses;
fat-free
green beans; cole slaw; and mashed potatoes with gravy.
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2-Piece
Dinner
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Fixins
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Chicken Supremes
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20-Piece
Tailgate
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Our menu also features salads, sandwiches and our whole meat Roasted Chicken Bites. For our sandwiches, our customers can
order grilled chicken or a Cajun Filet on a toasted bun. Our sandwiches are served with crisp lettuce and fresh tomato, with the option of adding hickory smoked bacon and sharp American cheese. We offer three salads, made fresh daily and featuring a
mix of crisp romaine and iceberg lettuce, red cabbage, grated carrots, sliced cucumber, grape tomatoes and Monterey jack and cheddar cheese. Our customers can also add our seasoned, grilled chicken breast filet and boneless whole breast tenderloin
filets to our salads for a delicious and satisfying meal.
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Grilled Chicken
Sandwich
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Chicken Supremes
Salad
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Grilled Chicken
Salad
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Roasted Chicken
Bites
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In addition, we serve a selection of sweets including our customers favorite
Bo-Berry
Biscuit, which is a made-from-scratch sweet biscuit, freshly baked and topped with delicious icing. We also offer our cinnamon biscuit and our signature sweet potato pie.
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Bo-Berry
Biscuit
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Cinnamon Biscuit
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Sweet Potato Pie
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Overall, we believe our differentiated menu of high-quality, hand-crafted food represents a great value with an average check
of only $7.08 for company-operated restaurants in fiscal 2016.
Restaurant Design
Our typical
full-size
restaurant is a modern, free-standing building which is approximately 3,900 square feet in size
and can seat approximately 70 customers. Our restaurant locations are typically free-standing urban or suburban locations, and are located on approximately one acre of land and include a drive-thru window and approximately 45 parking spaces. Our
restaurants are characterized by a unique exterior and interior design, color schemes, and layout, including specially designed decor and furnishings. The exterior of our current restaurant design is characterized by orange mansard roofs, tall brick
towers and stucco arches. Restaurant interiors incorporate modern designs and rich colors in an effort to provide a clean and inviting environment and fun, family-friendly atmosphere.
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Recently, we unveiled our new restaurant design, which we believe will enhance our brand and unit growth
opportunity. We opened our first Bojangles of the Future location in Greenville, South Carolina during the first fiscal quarter of 2017. Also during the first fiscal quarter of 2017, we began construction on our second
Bojangles of the Future location, which will be in Charlotte, North Carolina. In addition, we have approved other locations on which we expect to utilize our Bojangles of the Future design during fiscal 2017.
During fiscal 2016, we completed the initial phase of our Bojangles of the Future project, which included a complete review of the interior and exterior design of our restaurants, as well as what elements could potentially be
incorporated into future restaurant remodels. Our new restaurant design features a distinctive, contemporary exterior that combines sophisticated materials like brick and tile, as well as steel canopies. Soft lighting and landscaped planters
alongside the building and in the drive-thru lane are designed to provide the restaurant with a warm, welcoming feel. The new restaurant interior will center on the star of the Bojangles menuour made-from-scratch biscuits. Upon entering
the restaurant and proceeding to the counter, guests will be able to view our new Biscuit Theater where they can watch biscuits being made fresh every 20 minutes by a Bojangles Master Biscuit Maker. The dining room will also get a
refresh with wireless internet, multi-device electrical charging stations, unique
high-top
community tables and a variety of seating options to accommodate different sized groups. Although we have not yet
determined if the Bojangles of the Future will become our system-wide new unit standard, certain of these design features are being incorporated into current construction projects. We believe our Kitchen of the Future
redesign, which is now a new unit standard for our company-operated
full-size
restaurants, will support greater efficiency, better throughput and increased transactions.
In addition to the new construction Bojangles of the Future restaurants, we have also selected three company-operated restaurants in
Charlotte, North Carolina to be remodeled with many of the design elements in the Bojangles of the Future prototype.
In addition to our
standard restaurants, we have 38 Bojangles Express locations as of December 25, 2016, which are restaurants located in or attached to another business or other structures such as shopping malls, food courts, travel plazas, grocery stores,
college campuses, airports, military bases or convention centers or sports arenas, that may be as small as 800 square feet and as large as 3,800 square feet. Bojangles Express locations may be part of a larger structure or complex, and also
includes drive-thru only restaurants.
Site Selection and Expansion
New Restaurant Development
We believe our
restaurant model is designed to generate compelling cash flow, restaurant-level financial results and returns on invested capital, which we believe provide us with an attractive foundation for expansion. In fiscal 2013, we opened 18 company-operated
and 28 franchised restaurants, in fiscal 2014, we opened 24 company-operated and 28 franchised restaurants, in fiscal 2015, we opened 29 company-operated and 34 franchised restaurants and in fiscal 2016, we opened 29 company-operated and 29
franchised restaurants, contributing to annual system-wide unit growth of 7.8% in fiscal 2014, 6.4% in fiscal 2015 and 8.2% in fiscal 2016. Over the long term, we plan to grow the number of Bojangles system-wide restaurants by approximately 7%
to 8% annually.
Strategic Growth Plan
Our
strategic plan targets opening both company-operated and franchised restaurant units, increasing comparable restaurant sales and growing AUVs. This integrated strategy seeks to expand our market share by further penetrating existing markets and
growing into primarily contiguous new markets, leveraging our brand awareness. Our expansion into new markets typically follows a pattern over the long term of increasing AUVs as more consumers discover Bojangles and become loyal
to our brand and food. Increasing restaurant penetration and leveraging our broader marketing programs drive the conversion of customers in new markets. As we penetrate existing markets and enhance our market share, more marketing
dollars are available and we are able to
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increase our marketing spending through the use of various media types, benefiting both new and existing restaurants. When a marketing region reaches a specified level of penetration, the region
is elevated to a new marketing threshold which allows for higher impact advertising and drives traffic across the region. We experience significantly higher AUVs in Designated Market Areas (DMAs) where our restaurant density is high
enough to support elevated marketing spending. Our growth strategy is to continue opening restaurants in DMAs where we have higher unit penetration. In addition, we plan to open restaurants in DMAs where we have lower unit penetration so that we can
achieve the unit density required to benefit from pooled marketing dollars and increased customer awareness.
Site Selection Process
We consider the location of a restaurant to be a critical variable in its long-term success and as such, we devote significant effort to the investigation and
evaluation of potential restaurant locations. Our
in-house
development team has significant real estate experience in the restaurant industry. We adhere to a disciplined restaurant site selection plan, which
contains criteria based on a variety of factors, including population, demographics, access to breakfast traffic, and unit visibility. This detailed site selection plan allows us to target new restaurant locations primarily on the
going-to-work
side of the street to support breakfast sales, and near traffic light intersections on streets travelled by approximately 20,000 cars or more per
day. In addition, we use a third-party data analytics tool to assist in the site selection, and acquire information from data services to support our analysis. New company-operated and franchised restaurants are reviewed and approved by our real
estate committee, which includes our senior leadership team.
Construction
On average, it takes approximately one year from identification of a specific site to the opening of a new restaurant, which includes approximately five to six
months of due diligence review of the site and three to four months of construction time. Our new restaurants are typically
ground-up
prototypes but may include conversions. We estimate the land, building and
equipment of a new company-operated restaurant requires an average investment of approximately $2.4 million, including approximately $0.7 million for land, approximately $1.4 million for the building construction, which includes the
building and site and soft costs, and approximately $0.3 million for equipment. We primarily utilize
build-to-suit
developments and equipment financing leases for
our new company-operated restaurants, requiring minimal upfront cash investment. Each new restaurant under a
build-to-suit
development and equipment financing lease
typically requires an upfront cash equipment investment of approximately $85,000, and we target a year one
cash-on-cash
return of approximately 129% for our new
restaurants utilizing
build-to-suit
development and an equipment financing lease. While we primarily utilize a
build-to-suit
development strategy, our new restaurant strategy may change over time. We expect our average investment for new company-operated restaurants to increase related to our Bojangles of
the Future project. In addition, if our Bojangles of the Future project is successful, we may undertake more remodels than in previous years, which we expect will increase our total and average investment for remodels as we
incorporate the new design elements.
Restaurant Management and Operations
Service Philosophy
We are extremely focused on
customer service. In fiscal 2014, we introduced
Bo-Size
Service, which aims to deliver a Star Service experience and environment that compliments the quality of our food and models our culture. Our
Star Service culture includes key points of differencespeak to me, act like you care, hurry, get it right and bring me backwhich are defined as the simple, but specific,
opportunities for us to elevate the level of our service and customer satisfaction. We believe the key points of difference provide us a competitive advantage and a unique opportunity to exceed our customers expectations. Understanding these
points of difference, developing a culture of genuine customer-service values, and implementing them properly is an essential element of new team member training.
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We utilize tools such as our
Bo-Sat
Monitor guest survey program, which
is powered by the Service Management Group, to capture and measure customer feedback. During fiscal 2016, we completed the rollout of our
Bo-Sat
Monitor program to our franchise community, which allowed the
entire Bojangles system to operate under the same program. We believe this industry standard yields valuable data that is informing decisions across the organization, and transforming the way some things are done. As a result of knowledge
gained with this effort, we believe we can now dig much deeper into customer service opportunities and potentially elevate the Bojangles experience even higher for all our customers.
Recently, we also announced that we will be strategically adding labor initiatives, such as table service and more full-time versus part-time team members,
where we believe it will significantly enhance the customer service experience over time.
Quality, Food Safety and Handling Procedures
We and our franchisees are focused on maintaining high food quality and food safety in each restaurant through the careful training and supervision of
personnel and by following rigorous quality and cleanliness standards that have been established. Standards for food preparation and cleaning procedures are defined, monitored and maintained by our Operations and Training Departments. In
company-operated restaurants, we utilize third-party inspectors to regularly monitor restaurant performance through food safety audits. In addition, we expect to expand this program to our franchised restaurants beginning in fiscal 2017. As part of
our food quality assurance program, we have processes in place to monitor, as well as inspect and evaluate production runs of our products to ensure they meet specifications mutually agreed upon with our suppliers.
Managers and Team Members
Each restaurant
operates with five distinct dayparts (breakfast, lunch, snack, dinner and after dinner) and a staff of approximately 30 to 35 team members led by the unit director, assistant unit directors, and shift managers. Quality is constantly monitored
by area directors at company-operated restaurants and by franchise business consultants (FBCs) at franchised restaurants.
Before, during and
after our restaurants are serving customers, our team members focus intensely on daily operational execution. Our hard working and dedicated team members typically begin food preparation an hour before the restaurant opens and continue through
closing. Bojangles has a strict
pre-closing
policy that keeps each member of the team focused on customer service. Each team member has responsibility for cleaning throughout the day and the entire unit
is thoroughly cleaned each night. The restaurant level management team utilizes proven operational systems such as The Managers Walk to effectively manage each shift.
We are diligent in our team member selection processes, only hiring approximately 10% of those who began the application process in fiscal 2016. We aim to
staff our restaurants with team members that are friendly, customer-focused, driven to provide high-quality food, and who are also a good fit for our culture. As of December 25, 2016, our team member base was comprised of approximately 9,850
restaurant employees and approximately 250 support center personnel.
The heart of our business is our people and we encourage them to possess a strong
sense of pride in their jobs and to excel by participating in competitions that test and reward high performing restaurants and team members. Our ShowBo competition focuses on rewarding and recognizing the best team and involves unannounced visits
to evaluate each restaurant on service, quality and cleanliness.
Our Master Biscuit Makers
Our reputation is built on our signature chicken n biscuits. Our biscuit makers are at the heart of our business, baking made-from-scratch
biscuits all day, every day in our restaurants system-wide. Our biscuit makers strictly
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follow our
48-step
biscuit recipe, which includes using fresh buttermilk, hand rolling and cutting the dough and baking biscuits fresh in the oven every 20
minutes to ensure a consistent offering for every customer. We maintain high standards for our biscuit makers and require them to be
re-certified
every year to make sure we are providing the best possible
biscuits for our customers.
To highlight our strong sense of pride in our biscuit makers and how vital they are to our business, we encourage them to
excel in annual competitions that test and reward high performers. Our annual Master Biscuit Maker Challenge brings together team members from across our entire system of restaurants to compete for the honor of being named one of our
Champion Master Biscuit Makers. Each participant is judged on their ability to adhere to our
48-step
biscuit recipe, taking into account the size, shape and color of the biscuits and time it takes to complete
the process without sacrificing quality. The finalists for the competition have earned the highest scores out of hundreds of biscuit makers at the individual restaurant, area and regional levels and are invited to the final round at our headquarters
in Charlotte, North Carolina. The competition serves as a reminder to all team members who the real heroes of our company are and illustrates the pride our team members have in delivering our biscuit magic.
Training
We ensure that new unit directors in
company-operated restaurants possess the experience and passion necessary to deliver strong performance, and we support them with five to seven weeks of training in the Bojangles training program, including one week at our training center
located in Charlotte, North Carolina and known as Bojangles University. Many of our new restaurants draw experienced team members from nearby locations, in addition to utilizing an
all-star
team provided by the company to support the workforce from the opening day through the early weeks of operation. Leveraging our base of existing team members ensures that new restaurants operate seamlessly from day one and cultivates Bojangles
workplace culture, key drivers of our continued success and that of our franchisees.
We allow our and our franchisees principal operating
officer or partner, managers and other restaurant team members to attend optional training programs and seminars that we offer from time to time. We currently provide training in our certified company-operated restaurants and Bojangles
University. The initial training program is approximately five to seven weeks in duration consisting of classroom instruction and
on-the-job
training, and is conducted
approximately 10 times per year. We bear the cost of maintaining Bojangles University, including the overhead costs of training, staff salaries, materials and training tools. We require each trainee to complete the training program to our
satisfaction in order to be certified as a Bojangles company-operated restaurant manager.
Franchise Program
Overview
We use a franchising strategy to increase
new restaurant growth, leveraging the ownership of entrepreneurs with specific local market expertise and requiring a relatively minimal capital commitment by us. As of December 25, 2016, we had approximately 90 franchise entities that operated
407 restaurants. Our franchisees range in size from single-restaurant operators to the largest franchisee, which operated 64 restaurants as of December 25, 2016. Our existing franchise base consists of many successful, longstanding restaurant
operators, 52 of which operate multiple restaurants. As of December 25, 2016, our franchisees operated restaurants in 36 DMAs. Of our franchised restaurants, 371 were owned and operated by franchisees that have been with us for more than five
years, some of which have developed franchised restaurants as part of multi-unit, multi-year development agreements. In addition, many of our existing franchisees continue to develop restaurants without development agreements. We also support our
growth by attracting highly qualified and experienced new franchisees. We will continue to recruit new franchisees who we believe are capable of successful multi-unit development. We believe the revenues generated from our franchise base, including
royalty revenues, have historically served as an important source of stable and recurring cash flows to us and, as such, we plan to expand our base of franchised restaurants.
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Description of Franchise and Development Agreements
Our typical agreements for a
full-size
traditional unit grant a franchisee the right to operate for an initial term of
20 years with additional renewal terms that total 20 years subject to various conditions that include upgrades to the restaurant facility and brand image. Our typical express franchise agreements grant the right to operate for a period of 10 years
without renewal so that we can assess at the time of expiration if the market is better served by a
full-size
replacement. All franchise agreements grant licenses to use the Bojangles trademarks, trade
secrets and proprietary methods, recipes and procedures. Our obligations under the franchise agreement include an initial training program, ongoing advice and consultation in connection with operations and management of the restaurants, the
development of advertising materials, as well as advice and assistance in local marketing and inspections of a franchisees restaurants.
The initial
franchise fee for each
full-size
traditional unit is $25,000, and $15,000 for each express unit. Franchisees are required to pay as royalties 4% of franchise unit sales, except for certain grandfathered units
that may pay a lesser percentage and international locations that pay 5%. Franchisees, except for certain grandfathered units that may pay a lesser amount and international locations that are not required to contribute, are also required to pay 1%
of franchise unit sales to the Bojangles marketing development fund, to which we also contribute, which creates a pooled fund for the creation of marketing and advertising materials, marketing and media research, marketing promotions and a
portion of our marketing employees salaries and expenses. Franchisees are required to sign an advertising
co-operative
agreement, or the
co-op
agreement, in
connection with their franchise agreements that provides for pooled advertising funds when franchisees share a market with other franchisees or us. Typically, the
co-op
agreement requires that when an
advertising
co-operative
is activated, franchisees and the company units within the
co-operative
market must contribute up to 2% of unit sales to the
co-operative.
Finally, the franchise agreements require that franchisees spend from one to three percent of franchise unit sales on local marketing, depending upon whether an advertising
co-operative
has been activated in a franchisees market.
We often enter into development agreements with new and
existing franchisees that provide for planned assigned areas of unit development on a multi-unit, multi-year basis by a franchisee. A development agreement typically provides for the opening of one restaurant per year over a five-year term, but we
may grant rights to develop larger numbers of units more quickly, or may shorten the time allowed for development. Moreover, many franchisees develop on a
case-by-case
submittal basis rather than by formal development agreements. The development fee paid by a franchisee under a development agreement is $5,000 per each assigned unit, and this unit fee is deductible against the franchise fee for each unit developed
under the terms of the development agreement. Typically, more than one franchisee and, at times, we may develop in a market to increase the rate of penetration in that market in order to increase consumer awareness and, as a result, the availability
of pooled advertising funds in that market.
Franchise Owner Support
We value our franchisee relationships and provide strong support for their operations and growth initiatives to produce sustainable, long-term success. Our
restaurant development team provides consultation regarding site selection and approval processes and our franchise operating team provides consultation in all aspects of operations and preopening preparation. We also have
all-star
teams to provide assistance for the first two units a franchisee opens. Additionally, we conduct a mandatory management training program, requiring that for at least the first restaurant, a minimum of five
of each franchisees operating managers successfully complete a five to seven-week training program prior to opening. The program consists of
hands-on
training in the operation and management of the
restaurant and is conducted by a training manager who has been certified by us. Instructional materials for the initial training include our operations manual, wall charts, job aids, product build charts, ServSafe (food safety) book, videos and
other materials we may create from time to time. For the second and subsequent restaurants, franchisees have the option of training their own managers or using our training program without payment of additional fees.
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We also offer support well beyond restaurant opening. We provide ongoing leadership and assistance to the
franchisee network through our FBCs who maintain an open dialogue with franchisees on brand initiatives through webinars and quarterly market meetings, and help franchisees to evaluate sales growth and cost initiatives. By continuing to support our
franchise network and monitoring local performance, our FBCs help protect our brand. Additionally, we communicate with franchisees on at least a monthly basis, and senior company representatives meet quarterly with our franchise advisory council to
discuss system-wide initiatives, share ideas and resolve issues. In addition, we provide local marketing consultation and support, and prepare marketing materials for use by all franchisees in various media including television and radio through the
Bojangles marketing development fund.
Marketing and Advertising
We use multiple marketing channels, including television, radio, print advertising, billboard advertising, internet and social media and loyalty programs to
broadly drive brand awareness and traffic to our restaurants. We advertise on local network and cable television in our primary markets, and utilize heavier cable schedules for some of our less developed markets. During fiscal 2016, we and our
franchisees were active in television advertising, including cable placement, in approximately 26 DMAs of the 36 DMAs in which our system has restaurants, and we expect to add television advertising in additional DMAs in the future. During fiscal
2016, we and our franchisees utilized radio advertising in approximately 20 radio metro areas. We also sponsor arenas, race tracks, broadcast and sporting events including the Bojangles Coliseum in Charlotte, North Carolina, the Carolina
Panthers National Football League team, the Charlotte Hornets National Basketball Association team, the Fox Sports South-Atlanta Braves Television Network, the Atlantic Coast Conference basketball and football and other events and venues. In
addition, we are active in various charity and goodwill events and activities, including
in-restaurant
fundraising, auctions and events for the Muscular Dystrophy Association, Toys for Tots and St. Judes
Childrens Hospital. We engage in one on one conversations with our consumers using social media platforms such as Facebook, YouTube, Instagram and Twitter. We also use social media as a research and customer service tool, and apply insight we
gain to future marketing efforts.
We promote our restaurants and food through our Its Bo Time advertising campaign, which has become
synonymous with our brand. The campaign aims to deliver our message that our products are craveable and that Bojangles is a warm and friendly place to be. All domestic franchisees and the company contribute to the marketing development fund
for the development of marketing materials for use in various media, including radio and television commercials, promotions and sponsorships, marketing research as well as the cost of administration of the marketing development fund. The company
administers and may require franchisees participation in advertising
co-operatives
with other franchisees and the company to increase advertising levels based in pooled media advertising.
Purchasing and Distribution
Maintaining a high degree of
quality in our restaurants depends in part on our ability to acquire fresh ingredients and other necessary supplies that meet our specifications from reliable suppliers. We regularly inspect vendors to ensure that products purchased conform to our
standards and that prices offered are competitive. Our Quality Assurance Department works with our suppliers to obtain third-party audits. We negotiate terms, conditions and pricing directly with all suppliers of food and packaging. We contract with
our foodservice distributor for the distribution of all of our food and most of our supplies delivered to our restaurants, excluding
bone-in
chicken for some of our restaurants as of the end of fiscal 2016.
In September 2015, we entered into a Master Distribution Agreement with McLane Foodservice, Inc. (McLane), pursuant to which McLane was
appointed as an approved distributor for substantially all of the items used in our stores. We transitioned to McLane from our prior approved distributor during the first fiscal quarter of 2016. Our agreement with McLane extends through
March 31, 2023 and generally restricts us from using alternative distributors for most products. McLane delivers frozen, refrigerated and dry products, as well as
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most of our restaurant supplies, to most of our restaurants at least two times per week. We contract with four primary suppliers for our
bone-in
chicken
which is supplied to us by various distributors, including McLane. Our agreement with McLane allows for us to transition the
bone-in
chicken distribution through McLane. A portion of our restaurants completed
the transition to
bone-in
chicken distribution through McLane during fiscal 2016, with the remaining company-operated restaurants expected to transition during fiscal 2017. These
bone-in
chicken distributors typically deliver to most of our company-operated restaurants at least two times per week. Our franchisees are required to use an approved distributor and approved manufacturers
for the purchase of their food and supplies. Franchisees can elect to transition to
bone-in
chicken distribution through McLane or, if quality standards can be met, continue to receive deliveries from other
approved chicken distributors.
In our normal course of business, we evaluate bids from multiple suppliers for various products. Poultry and other
proteins are our largest product cost items and represented approximately 45% of company-operated food and supplies costs in fiscal 2016. Fluctuations in supply and prices can significantly impact our restaurant service and profit performance. We
actively manage cost volatility for poultry by negotiating directly with multiple suppliers, purchasing from suppliers with what we believe are the most favorable terms given existing market conditions.
Intellectual Property
We have registered Bojangles
®
and certain other names used by our restaurants as trademarks or service marks with the United States Patent and Trademark Office. The
Bojangles
®
trademark is also registered in some form in approximately 25 foreign countries. Our current brand campaign tag line, Its Bo
Time
®
, has also been registered with the United States Patent and Trademark Office. We also have registered the configuration of our Big Bo Box as a trademark, and we continue to expand the
family of Bojangles related trademarks. In addition, the Bojangles logo, website name and address and Facebook and Twitter accounts are our intellectual property. Our policy is to pursue and maintain registration of service marks and
trademarks in those countries where permitted and where business strategy requires us to do so and to oppose vigorously any infringement or dilution of the service marks or trademarks. We or our suppliers maintain the seasonings and additives for
our chicken and biscuits, and our other products, as well as certain standards, specifications and operating procedures, as trade secrets or confidential information.
Competition
We operate in the limited service restaurant
industry, which is highly competitive and fragmented. The number, size and strength of competitors vary by region. Our competition includes a variety of locally owned restaurants and national and regional chains that offer
dine-in,
carry-out
and delivery services. Our competition in the broadest perspective includes restaurants, convenience food stores, delicatessens, supermarkets and club
stores. However, more specifically, we compete with fast-casual restaurants, such as Chipotle and Panera Bread Company, quick-service restaurants who serve breakfast, such as McDonalds and Hardees, and chicken-specialty and Cajun
quick-service restaurants, such as
Chick-fil-A,
Popeyes Louisiana Kitchen and Zaxbys.
We believe competition within the fast-casual restaurant segment is based primarily on fresh ingredients and preparation of food, quality, taste, service and
ambience. We also believe that QSR competition is based primarily on value, speed of service, convenience of drive-thru service, brand recognition and restaurant location. In addition, we compete with franchisors of other restaurant concepts for
prospective franchisees.
Environmental Matters
We
are subject to federal, state and local laws and regulations relating to environmental protection, including regulation of discharges into the air and water, storage and disposal of waste and
clean-up
of
contaminated soil and groundwater. Under various federal, state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of hazardous or toxic substances on, in or emanating from such property.
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Such liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances, and in some cases we may have
obligations imposed by indemnity provisions in our leases.
We have not conducted a comprehensive environmental review of all of our properties, although
for new company development, a Phase I environmental review is typically completed, and when advisable, a Phase II review, prior to our undertaking a long-term lease. No assurance can be given that we have identified all of the potential
environmental liabilities at our properties or that such liabilities will not have a material adverse effect on our financial condition.
Regulation
and Compliance
We are subject to extensive federal, state and local government regulation, including those relating to, among others, public health
and safety, zoning and fire codes, and franchising. Failure to obtain or retain food or other licenses and registrations or exemptions would adversely affect the operations of restaurants, or the ability to franchise. Although we have not
experienced and do not anticipate any significant problems in obtaining required licenses, permits or approvals, any difficulties, delays or failures in obtaining such licenses, permits, registrations, exemptions, or approvals could delay or prevent
the opening of, or adversely impact the viability of, a restaurant in a particular area.
The development and construction of additional restaurants will
be subject to compliance with applicable regulations, including those relating to zoning, land use, water quality and retention, and environment.
We
believe federal and state environmental regulations have not had a material effect on operations, but more stringent and varied requirements of local government bodies with respect to zoning, land use and environmental factors, among others, could
delay construction and increase development costs for new restaurants.
We are also subject to the Fair Labor Standards Act, the Immigration Reform and
Control Act of 1986 and various federal and state laws governing such matters as minimum wages, exempt versus
non-exempt,
overtime, unemployment tax rates, workers compensation rates, citizenship
requirements and other working conditions. A significant portion of the hourly staff is paid at rates consistent with the applicable federal or state minimum wage and, accordingly, increases in the minimum wage and/or changes in exempt versus
non-exempt
status will increase labor costs. In addition, the Patient Protection and Affordable Care Act of 2010 (PPACA) increased medical costs beginning in fiscal 2015 and we expect further increases
in subsequent years. We are also subject to the Americans with Disabilities Act, which prohibits discrimination on the basis of disability in public accommodations and employment, which may require us to design or modify our restaurants to make
reasonable accommodations for disabled persons.
For a discussion of the various risks we face from regulation and compliance matters, see Risk
Factors.
Management Information Systems
All
of our company-operated restaurants use computerized
point-of-sale
and back office systems, which we believe are scalable to support our long-term growth plans. The
point-of-sale
system provides a touch screen interface and integrated, high speed credit card and gift card processing. The
point-of-sale
system is used to collect daily transaction data from company-operated restaurants, which generates information about product mix and daily sales that we actively analyze. During fiscal 2015, we
completed migrating our company-operated restaurants to a new
point-of-sale
system and during the post-transition there may be a period of time during which the
transactional data for the restaurants that migrated to the new
point-of-sale
system is in a format that is not easily usable for analytical purposes.
Our
in-restaurant
back office computer system is designed to assist in the management of our restaurants and provide
labor and food cost management tools. The system also provides our support center and restaurant
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operations management quick access to detailed business data and reduces the time our restaurant managers spend on administrative needs. The system also provides sales, bank deposit and variance
data to our finance department on a daily basis. For company-operated restaurants, we use this data to generate daily, weekly and/or period reports regarding sales and other key measures. The XPIENT
point-of-sale
and back office systems are available for use in franchised restaurants, but there are other systems currently in use and otherwise available that may be used by franchisees.
Additionally, we are working on several other key initiatives, including mobile payment, online ordering and a customer loyalty program, which we believe will
improve our customer experience, capture large group ordering and increase transactions.
Geographic Footprint
As of December 25, 2016, we had 309 domestic company-operated restaurants and 404 domestic franchised restaurants located in eleven states, including
North Carolina, South Carolina, Georgia, Virginia, Tennessee, Alabama, Maryland, Florida, Kentucky, West Virginia and Pennsylvania, and the District of Columbia. In addition, we currently have three international franchised restaurants in Roatan
Island, Honduras. International stores represented less than 1% of our revenues in each of fiscal 2016, fiscal 2015 and fiscal 2014.
Employees
As of December 25, 2016, we had approximately 10,100 employees, of whom approximately 9,850 were restaurant employees and approximately 250 were
support center personnel. None of our employees are part of a collective bargaining agreement, and we believe our relationships with our employees are satisfactory.
Seasonality
Seasonal factors cause our revenues to
fluctuate from fiscal quarter to fiscal quarter. Our revenues per restaurant are typically lower in the first fiscal quarter. As a result, our quarterly and annual operating results and key performance indicators may fluctuate significantly.
Item 1A. Risk Factors
You should consider carefully the following risks and uncertainties when reading this Annual Report. If any of the following risks actually occurs, our
business, financial condition and results of operations could be materially and adversely affected. In that event, the trading price of our common stock could decline. Although we believe that we have identified and discussed below the key risk
factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our performance or financial condition.
Risks Related to Our Business and Industry
We are
vulnerable to changes in consumer preferences and economic conditions that could harm our business, financial condition, results of operations and cash flow.
Food service businesses depend on consumer discretionary spending and are often affected by changes in consumer tastes, national, regional and local economic
conditions and demographic trends. Factors such as traffic patterns, weather, fuel prices, local demographics and the type, number and locations of competing restaurants may adversely affect the performances of individual locations. In addition,
economic downturns, inflation or increased food or energy costs could harm the restaurant industry in general and our locations in particular. Adverse changes in any of these factors could reduce consumer traffic or impose practical limits on
pricing that could harm our business, financial condition, results of operations and cash flow. There can be no assurance that
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consumers will continue to regard Southern-inspired, chicken-based or fried food favorably or that we will be able to develop new menu items that appeal to consumer preferences. Also, changes in
consumer shopping habits, such as increased utilization of online retailers, could reduce traffic and transactions in our restaurants and negatively impact our business. Our business, financial condition and results of operations depend in part on
our ability to anticipate, identify and respond to changing consumer preferences and economic conditions. In addition, the restaurant industry is currently under heightened legal and legislative scrutiny related to menu labeling and resulting from
the perception that the practices of restaurant companies have contributed to nutritional, caloric intake, obesity or other health concerns of their guests. If we are unable to adapt to changes in consumer preferences and trends, we may lose
customers and our revenues may decline.
Our growth strategy depends in part on opening new restaurants in existing and new markets and expanding
our franchise system. We may be unsuccessful in opening new company-operated or franchised restaurants or establishing new markets, which could adversely affect our growth.
One of the key means to achieving our growth strategy will be through opening restaurants and operating those restaurants on a profitable basis. We opened 24
company-operated restaurants in fiscal 2014, opened 29 company-operated restaurants in fiscal 2015 and opened 29 company-operated restaurants in fiscal 2016. Our franchisees opened 28 franchise operated restaurants in fiscal 2014, opened 34
franchise operated restaurants in fiscal 2015 and opened 29 franchise operated restaurants in fiscal 2016. Our ability to open new restaurants is dependent upon a number of factors, many of which are beyond our control, including our and our
franchisees ability to:
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identify available and suitable restaurant sites;
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compete for restaurant sites;
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reach acceptable agreements regarding the lease or purchase of locations;
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obtain or have available the financing required to acquire and operate a restaurant, including construction and opening costs, which includes access to
build-to-suit
leases and equipment financing leases at favorable interest and capitalization rates;
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respond to unforeseen engineering or environmental problems with leased premises;
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avoid the impact of inclement weather, natural disasters and other calamities;
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hire, train and retain the skilled management and other employees necessary to meet staffing needs;
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obtain, in a timely manner and for an acceptable cost, required licenses, permits and regulatory approvals and respond effectively to any changes in local, state or federal law and regulations that adversely affect our
and our franchisees costs or ability to open new restaurants; and
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control construction and equipment cost increases for new restaurants.
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There is no guarantee that a
sufficient number of suitable restaurant sites will be available in desirable areas or on terms that are acceptable to us in order to achieve our growth plan. If we are unable to open new restaurants or sign new franchisees, or if existing
franchisees do not open new restaurants, or if restaurant openings are significantly delayed, our revenues or earnings growth could be adversely affected and our business negatively affected.
As part of our longer term growth strategy, we may enter into geographic markets in which we have little or no prior operating or franchising experience
through company-operated restaurant growth and through franchise development agreements. The challenges of entering new markets include: difficulties in hiring experienced personnel; unfamiliarity with local real estate markets and demographics;
consumer unfamiliarity with our brand; and different competitive and economic conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than in our existing markets. Consumer recognition of our
brand has been
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important in the success of company-operated and franchised restaurants in our existing markets. Restaurants we open in new markets may take longer to reach expected sales and profit levels on a
consistent basis and may have higher construction, occupancy and operating costs than existing restaurants, thereby affecting our overall profitability. In addition, consumer tastes and breakfast preferences may vary geographically for
Southern-inspired items, which could affect our overall sales and profitability. Any failure on our part to recognize or respond to these challenges may adversely affect the success of any new restaurants. Expanding our franchise system could
require the implementation, expense and successful management of enhanced business support systems, management information systems and financial controls as well as additional staffing, franchise support and capital expenditures and working capital.
Due to brand recognition and logistical synergies, as part of our growth strategy, we also intend to open new restaurants in areas where we have existing
restaurants. The operating results and comparable restaurant sales for our restaurants could be adversely affected due to close proximity with our other restaurants and market saturation.
New restaurants, once opened, may not be profitable or may close, and historical average restaurant revenues and comparable restaurant sales may not be
indicative of future results.
Some of our restaurants open with an initial
start-up
period of higher than
normal sales volumes, which subsequently decrease to stabilized levels. In new markets, the length of time before average sales for new restaurants stabilize is less predictable and can be longer as a result of our limited knowledge of these markets
and consumers limited awareness of our brand. In addition, our average restaurant revenues and comparable restaurant sales may not increase at historical rates. We may also not be successful in our new restaurant design for new restaurants and
remodels of our existing restaurants in connection with our Bojangles of the Future project. Our ability to operate new restaurants profitably and increase average restaurant revenues and comparable restaurant sales will depend on
many factors, some of which are beyond our control, including:
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consumer awareness and understanding of our brand;
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general economic conditions, which can affect restaurant traffic, local labor costs and prices we pay for the food products and other supplies we use;
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consumption patterns and food preferences that may differ from region to region;
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changes in consumer preferences and discretionary spending;
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difficulties obtaining or maintaining adequate relationships with distributors or suppliers in new markets;
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increases in prices for commodities, including chicken and other proteins;
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inefficiency in our labor costs as the staff gains experience;
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competition, either from our competitors in the restaurant industry or our own restaurants;
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temporary and permanent site characteristics of new restaurants;
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changes in government regulation;
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increased remodeling projects and associated costs, construction costs, cash capital expenditures, operating costs, depreciation and amortization expenses, and general and administrative expenses associated with our
Bojangles of the Future and technology projects; and
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other unanticipated increases in costs, any of which could give rise to delays or cost overruns.
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If our new
restaurants do not perform as planned or close, our business and future prospects could be harmed. In addition, an inability to achieve our expected average restaurant revenues could have a material adverse effect on our business, financial
condition and results of operations.
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Opening new restaurants in existing markets may negatively impact sales at our and our franchisees
existing restaurants.
The consumer target area of our and our franchisees restaurants varies by location, depending on a number of factors,
including population density, other local retail and business attractions, area demographics and geography. As a result, the opening of a new restaurant in or near markets in which we or our franchisees already have restaurants could adversely
impact sales at these existing restaurants. Existing restaurants could also make it more difficult to build our and our franchisees consumer base for a new restaurant in the same market. Our core business strategy does not entail opening new
restaurants that we believe will materially affect sales at our or our franchisees existing restaurants. However, we cannot guarantee there will not be significant impact in some cases and we may selectively open new restaurants in and around
areas of existing restaurants that are operating at or near capacity to effectively serve our customers. Sales cannibalization between our restaurants may become significant in the future as we continue to expand our operations and could affect our
sales growth, which could, in turn, materially and adversely affect our business, financial condition and results of operations.
Our sales growth
and ability to achieve profitability could be adversely affected if comparable restaurant sales are less than we expect.
The level of comparable
restaurant sales, which reflect the change in year-over-year sales for restaurants in the fiscal month following 15 months of operation using a
mid-month
convention, will affect our sales growth and will
continue to be a critical factor affecting our ability to generate profits because the profit margin on comparable restaurant sales is generally higher than the profit margin on new restaurant sales. Our ability to increase comparable restaurant
sales depends in part on our ability to successfully implement our initiatives to build sales. It is possible such initiatives will not be successful, that we will not achieve our target comparable restaurant sales growth or that the change in
comparable restaurant sales could be negative, which may cause a decrease in sales growth and ability to achieve profitability that would have a material adverse effect on our business, financial condition and results of operations.
Our marketing programs may not be successful, and our new menu items, advertising campaigns, technology initiatives and restaurant designs and remodels
may not generate increased sales or profits.
We incur costs and expend other resources in our marketing efforts on new menu items, advertising
campaigns and restaurant designs and remodels to raise brand awareness and attract and retain customers. We are also working on several other key technology initiatives, including mobile payment, online ordering and a customer loyalty program, which
we believe will improve our customer experience, capture large group ordering and increase transactions. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues. In addition, if we choose higher
price points for promotional items, do less targeted discounting or increase our prices too much, our sales could be negatively impacted, which could have a material adverse effect on our results of operations and financial condition.
Further, if we are successful with the implementation of our technology initiatives related to mobile payment, online ordering and customer loyalty program,
we may be required to introduce new
in-store
procedures and tools in order to execute operationally, which could include adding new roles and resources. Any changes to our restaurant operations associated with
our technology initiatives could result in additional restaurant operating expenses and could negatively impact our results of operations.
Additionally,
some of our competitors have greater financial resources, which enable them to spend significantly more on marketing and advertising and other initiatives than we are able to. Should our competitors increase spending on marketing and advertising and
other initiatives such as additional discounting or our marketing funds decrease for any reason, or should our advertising, promotions, new menu items, technology initiatives and restaurant designs and remodels be less effective than our
competitors, there could be a material adverse effect on our results of operations and financial condition.
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Changes in food and supplies costs, especially for chicken, could adversely affect our business, financial
condition and results of operations.
Our profitability depends in part on our ability to anticipate and react to changes in food and supplies
costs. We are susceptible to increases in food costs as a result of factors beyond our control, such as general economic conditions, seasonal economic fluctuations, weather conditions, global demand, food safety concerns, infectious diseases,
fluctuations in the U.S. dollar, product recalls and government regulations. Although our overall food and supplies costs as a percentage of company restaurant revenues decreased during fiscal 2016, the costs of many basic foods for humans and
animals, including wheat and cooking oil, have increased markedly in recent years, resulting in upward pricing pressures on almost all of our raw ingredients, including chicken (especially limited service
restaurant-sized
chickens) and pork. Food prices for a number of our key ingredients escalated markedly at various points in fiscal 2014, fiscal 2015 and fiscal 2016. As a result of such pricing
pressures, we have experienced, and expect to continue to experience, significant increases in the costs of certain ingredients for items on our menu. In addition, due to the avian flu the cost of our eggs and seasoned fried turkeys were
significantly higher in recent years. Weather related issues, such as freezes or drought, may also lead to temporary spikes in the prices of some ingredients such as produce or meats. Any increase in the prices of the ingredients most critical to
our menu, such as chicken, pork, dairy and wheat, would adversely affect our operating results. Alternatively, in the event of cost increases with respect to one or more of our raw ingredients, we may choose to temporarily suspend serving menu items
rather than paying the increased cost for the ingredients. Any such changes to our available menu may negatively impact our restaurant traffic, business and comparable restaurant sales during the shortage and thereafter. We have implemented menu
price increases in the past to significantly offset the higher prices of food and supplies costs. We may not be able to offset all or any portion of increased food and supplies costs through higher menu prices in the future. If we or our franchisees
implement further menu price increases in the future to protect our margins, restaurant traffic could be materially adversely affected, at both company-operated and franchised restaurants.
Our principal food product is chicken. In fiscal 2014, fiscal 2015 and fiscal 2016, the cost of chicken and other proteins included in our product cost was
approximately 44%, 46% and 45%, respectively, of our food and supplies costs from company-operated restaurants. Material increases in the cost of chicken and other proteins could materially adversely affect our business, operating results and
financial condition. Changes in the cost and availability of chicken can result from a number of factors, including seasonality, increases in the cost of grain, disease and other factors that affect availability, greater international demand for
domestic chicken products, decreased numbers of size and choice chickens, especially limited service
restaurant-sized
chickens, increased costs for
larger-sized
chickens, which must be purchased if we are unable to purchase sufficient quantities of limited service
restaurant-sized
chickens, and increased transportation costs.
A major driver of the price of corn, which is the primary feed source for chicken, has been the increasing demand for corn by the ethanol industry as an
alternative fuel source, as most ethanol plants in the United States use corn as the primary source of grain to make ethanol. This increased demand on the nations corn crop has had and may continue to have an adverse impact on chicken prices.
While we have some supply agreements that allow us to lock in prices of certain raw ingredients for certain periods of time, we currently do not make extensive use of futures contracts or other financial risk management strategies with respect to
potential price fluctuations in the cost of chicken, pork or other raw ingredients, food and supplies.
Wheat is an ingredient in some of our principal
food products. Changes in the cost and availability of wheat may be affected by a number of factors, including economic and industry conditions, crop disease, weed control, water availability, various planting/growing/harvesting problems, and severe
weather conditions such as drought, floods or frost that are difficult to anticipate and which cannot be controlled. Demand for food products made from wheat flour is affected by changes in consumer tastes, demographic trends and national, regional
and local economic conditions.
Another of our principal food products is pork. Material increases in the cost of pork could materially adversely affect
our business, operating results and financial condition. Changes in the cost of pork can result from a
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number of factors, including seasonality, increases in the cost of grain, disease and viruses and other factors that affect availability and greater international demand for domestic pork
products.
We may not be able to compete successfully with other quick-service and fast-casual restaurants. Intense competition in the restaurant
industry could make it more difficult to expand our business and could also have a negative impact on our operating results if customers favor our competitors or we are forced to change our pricing and other marketing strategies.
The food service industry, and particularly its quick-service and fast-casual segments, is intensely competitive. In addition, the Southeastern United States,
the primary market in which we compete, consists of what we believe to be the most competitive Southern-inspired quick-service and fast-casual market in the United States. We expect competition in this market and each of our other markets to
continue to be intense because consumer trends are favoring limited service restaurants that offer healthier menu items made with better quality products, and many limited service restaurants are responding to these trends. Competition in our
industry is primarily based on price, convenience, quality of service, brand recognition, restaurant location and type and quality of food. If our company-operated and franchised restaurants cannot compete successfully with other quick-service and
fast-casual restaurants in new and existing markets, we could lose customers and our revenues could decline. Our company-operated and franchised restaurants compete with national and regional quick-service and fast-casual restaurant chains for
customers, restaurant locations and qualified management and other staff. Compared with us, some of our competitors have substantially greater financial and other resources, have been in business longer, have greater brand recognition or are better
established in the markets where our restaurants are located or are planned to be located. In addition, competition has increased in the breakfast market as more competitors have entered the breakfast market or expanded their breakfast menu to be
served all day, which may negatively impact our sales. Also, certain of our competitors have increased discounting and others have expanded their online ordering and delivery options, both of which may negatively impact our sales. Any of these
competitive factors may materially adversely affect our business, financial condition or results of operations.
The financial performance of our
franchisees can negatively impact our business.
As 57% of our restaurants are franchised as of December 25, 2016, our financial results are
dependent in part upon the operational and financial success of our franchisees. We receive royalties, franchise fees, contributions to our marketing development fund and
co-op
advertising funds, and other
fees from our franchisees. We have established operational standards and guidelines for our franchisees; however, we have limited control over how our franchisees businesses are run. While we are responsible for ensuring the success of our
entire system of restaurants and for taking a longer term view with respect to system improvements, our franchisees have individual business strategies and objectives, which might conflict with our interests. Our franchisees may not be able to
secure adequate financing to open or continue operating their Bojangles restaurants. If they incur too much debt or if economic or sales trends deteriorate such that they are unable to repay existing debt, our franchisees could experience
financial distress or even bankruptcy. We also anticipate that we and our franchisees have been and will be financially impacted by the implementation of, and any potential changes to, the health care reform legislation and labor regulations. If a
significant number of franchisees become financially distressed, it could harm our operating results through reduced royalty revenues and the impact on our profitability could be greater than the percentage decrease in the royalty revenues. Closure
of franchised restaurants would reduce our royalty revenues and could negatively impact margins, since we may not be able to reduce fixed costs which we continue to incur.
We have limited control with respect to the operations of our franchisees, which could have a negative impact on our business.
Franchisees are independent business operators and are not our employees, and we do not exercise control over the
day-to-day
operations of their restaurants. We provide training and support to franchisees, and set and monitor operational standards, but the quality of franchised restaurants may be diminished by any number
of
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factors beyond our control. Consequently, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements, or may not hire and train qualified
managers and other restaurant personnel. If franchisees do not operate to our expectations, our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could decline significantly, which
would reduce our royalty revenues, and the impact on profitability could be greater than the percentage decrease in royalties and fees.
The
challenging economic environment may affect our franchisees, with adverse consequences to us.
We rely in part on our franchisees and the manner in
which they operate their locations to develop and promote our business. As of December 25, 2016, our top three franchisees operated 156 of our franchised restaurants and accounted for approximately 44% of our royalty revenues in both fiscal
2016 and fiscal 2015. Due to the continuing challenging economic environment, it is possible that some franchisees could file for bankruptcy or become delinquent in their payments to us, which could have a significant adverse impact on our business
due to loss or delay in payments of royalties, contributions to our marketing development fund and
co-op
advertising funds and other fees. Bankruptcies by our franchisees could prevent us from terminating
their franchise agreements so that we can offer their territories to other franchisees, negatively impact our market share and operating results as we may have fewer well-performing restaurants, and adversely impact our ability to attract new
franchisees.
Although we have developed criteria to evaluate and screen prospective developers and franchisees, we cannot be certain that the developers
and franchisees we select will have the business acumen or financial resources necessary to open and operate successful franchises in their franchise areas, and state franchise laws may limit our ability to terminate or modify these franchise
arrangements. Moreover, franchisees may not successfully operate restaurants in a manner consistent with our standards and requirements, or may not hire and train qualified managers and other restaurant personnel. The failure of developers and
franchisees to open and operate franchises successfully could have a material adverse effect on us, our reputation, our brand and our ability to attract prospective franchisees and could materially adversely affect our business, financial condition,
results of operations and cash flows.
Franchisees may not have access to the financial or management resources that they need to open the restaurants
contemplated by their agreements with us, or be able to find suitable sites on which to develop them. Franchisees may not be able to negotiate acceptable lease or purchase terms for restaurant sites, obtain the necessary permits and government
approvals or meet construction schedules. Any of these problems could slow our growth and reduce our franchise revenues. Additionally, our franchisees typically depend on financing from banks and other financial institutions, which may not always be
available to them, in order to construct and open new restaurants. For these reasons, franchisees operating under development agreements may not be able to meet the new restaurant opening dates required under those agreements. Also, as of
December 25, 2016, we sublease certain restaurants and equipment to six franchisees which comprise ten restaurants and lease land, building and equipment we own to one of our franchisees. If any such franchisees cannot meet their financial
obligations under their subleases, or otherwise fail to honor or default under the terms of their subleases, we would be financially obligated under a master lease and could be adversely affected.
Our system-wide restaurant base is geographically concentrated in the Southeastern United States, and we could be negatively affected by conditions
specific to that region.
Our company-operated and franchised restaurants in the Southeastern United States represent approximately 99% of our
system-wide restaurants as of December 25, 2016. Our company-operated and franchised restaurants in North Carolina and South Carolina represent approximately 61% of our system-wide restaurants as of December 25, 2016. Approximately 70% of
our company-operated restaurants are located in North Carolina and South Carolina as of December 25, 2016. Adverse changes in demographic, unemployment, economic, regulatory or weather conditions in the Southeastern United States have had, and
may continue to have, material
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adverse effects on our business. As a result of our concentration in this market, we have been, and in the future may be, disproportionately affected by these adverse conditions compared to other
chain restaurants with a national footprint.
In addition, our competitors could open additional restaurants in North Carolina and South Carolina, where
we have significant concentration with over 435 of our system restaurants, which could result in reduced market share for us and may adversely impact our profitability.
Negative publicity could reduce sales at some or all of our restaurants.
We may, from time to time, be faced with negative publicity relating to food quality, the safety, sanitation and welfare of our restaurant facilities, customer
complaints or litigation alleging illness or injury, health inspection scores, integrity of our or our suppliers food processing and other policies, practices and procedures, employee relationships and welfare or other matters at one or more
of our restaurants. Negative publicity may adversely affect us, regardless of whether the allegations are valid or whether we are held to be responsible. In addition, the negative impact of adverse publicity relating to one restaurant may extend far
beyond the restaurant involved, especially due to the high geographic concentration of many of our restaurants, to affect some or all of our other restaurants, including our franchised restaurants. The risk of negative publicity is particularly
great with respect to our franchised restaurants because we are limited in the manner in which we can regulate them, especially on a real-time basis and negative publicity from our franchised restaurants may also significantly impact
company-operated restaurants. A similar risk exists with respect to food service businesses unrelated to us, if customers mistakenly associate such unrelated businesses with our operations. Employee claims against us based on, among other things,
wage and hour violations, discrimination, harassment or wrongful termination may also create not only legal and financial liability but negative publicity that could adversely affect us and divert our financial and management resources that would
otherwise be used to benefit the future performance of our operations. These types of employee claims could also be asserted against us, on a
co-employer
theory, by employees of our franchisees. A significant
increase in the number of these claims or an increase in the number of successful claims could materially adversely affect our business, financial condition, results of operations and cash flows.
Food safety and quality concerns may negatively impact our business and profitability, our internal operational controls and standards may not always be
met and our employees may not always act professionally, responsibly and in our and our customers best interests. Any possible instances of food-borne illness could reduce our restaurant sales.
Incidents or reports of food-borne or water-borne illness or other food safety issues, food contamination or tampering, employee hygiene and cleanliness
failures or improper employee conduct at our restaurants could lead to product liability or other claims. Such incidents or reports could negatively affect our brand and reputation as well as our business, revenues and profits. Similar incidents or
reports occurring at limited service restaurants unrelated to us could likewise create negative publicity, which could negatively impact consumer behavior towards us.
We cannot guarantee to consumers that our internal controls and training will be fully effective in preventing all food-borne illnesses. Furthermore, our
reliance on third-party food processors makes it difficult to monitor food safety compliance and may increase the risk that food-borne illness would affect multiple locations rather than single restaurants. Some food-borne illness incidents could be
caused by third-party food suppliers and transporters outside of our control. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise to claims or
allegations on a retroactive basis. One or more instances of food-borne illness in one of our company-operated or franchised restaurants could negatively affect sales at all of our restaurants if highly publicized, especially due to the high
geographic concentration of many of our restaurants. This risk exists even if it were later determined that the illness was wrongly attributed to one of our restaurants. A number of other restaurant chains have experienced incidents related to
food-borne illnesses that have had material adverse impacts on their operations, and we cannot assure
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you that we could avoid a similar impact upon the occurrence of a similar incident at one of our restaurants. Additionally, even if food-borne illnesses were not identified at our restaurants,
our restaurant sales could be adversely affected if instances of food-borne illnesses at other restaurant chains were highly publicized. In addition, our restaurant sales could be adversely affected by publicity regarding other high-profile
illnesses such as avian flu or swine flu that customers may associate with our food products.
Except for a portion of our fresh chicken, we rely on
one company to distribute substantially all of our food and supplies to company-operated and franchised restaurants. We also rely on a limited number of companies, and, in some cases, a sole company, to supply certain products, supplies and
ingredients to our distributor. Failure to receive timely deliveries of food or other supplies could result in a loss of revenues and materially and adversely impact our operations.
Our and our franchisees ability to maintain consistent quality menu items and prices significantly depends upon our ability to acquire quality food
products, including chicken and related items, from reliable sources in accordance with our specifications on a timely basis. Shortages or interruptions in the supply of food products caused by unanticipated demand, problems in production or
distribution, contamination of food products, an outbreak of poultry or pork diseases, inclement weather or other conditions could materially adversely affect the availability, quality and cost of ingredients, which would adversely affect our
business, financial condition, results of operations and cash flows. We have contracts with a limited number of suppliers, and, in some cases, a sole supplier, for certain products, supplies and ingredients. Certain menu items and ingredients are
provided to us and our franchisees by single suppliers for various proteins and a single supplier for spices. We have limited rights to access the exclusive formulas used for us by one of the single-source suppliers. In September 2015, we entered
into a Master Distribution Agreement with McLane, pursuant to which McLane was appointed as an approved distributor for substantially all of the food and supplies used in our company-operated and franchised stores, including buttermilk. We
transitioned to McLane from our prior approved distributor during the first fiscal quarter of 2016. Our agreement with McLane also allows for us to transition the
bone-in
chicken distribution through McLane. A
portion of our restaurants completed the transition to
bone-in
chicken distribution through McLane during fiscal 2016, with the remaining company-operated restaurants expected to transition during fiscal 2017.
If McLane or our fresh chicken suppliers fail to perform as anticipated or seek to terminate agreements with us or our franchisees, or if there is any disruption in any of our supply or distribution relationships for any other reason, we or our
franchisees could be forced to temporarily close a restaurant or remove popular items from a restaurants menu due to a supply shortage. In such event, that restaurant may experience a significant reduction in revenues during the time affected
by the shortage and thereafter if our customers change their dining habits as a result, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our level of indebtedness could materially and adversely affect our business, financial condition and results of operations.
The total debt outstanding under our credit facility and capital lease obligations at December 25, 2016 was $187.3 million and we had no borrowings
outstanding under our revolving credit facility. Our indebtedness could have significant effects on our business, such as:
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limiting our ability to borrow additional amounts to fund working capital, capital expenditures, acquisitions, debt service requirements, execution of our growth strategy and other purposes;
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requiring us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our debt, which would reduce availability of our cash flow to fund working capital, capital expenditures,
acquisitions, execution of our growth strategy and other general corporate purposes;
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making us more vulnerable to adverse changes in general economic, industry and competitive conditions, in government regulation and in our business by limiting our ability to plan for and react to changing conditions;
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placing us at a competitive disadvantage compared with our competitors that have less debt; and
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exposing us to risks inherent in interest rate fluctuations because our borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.
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In addition, we may not be able to generate sufficient cash flow from our operations to repay our indebtedness when it becomes due and to
meet our other cash needs. If we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or
equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our ability to generate revenues.
Our agreements relating to our term loan and revolving credit facility contain a number of covenants that, among other things, restrict, subject to certain
exceptions, our ability to (i) incur additional indebtedness, (ii) issue preferred stock, (iii) create liens on assets, (iv) engage in mergers or consolidations, (v) sell assets, (vi) make investments, loans, or
advances, (vii) make certain acquisitions, (viii) engage in certain transactions with affiliates, (ix) authorize or pay dividends, (x) change our lines of business or fiscal year and (xi) not exceed
pre-determined
maximum cash capital expenditures. In addition, our term loan and revolving credit facility requires us to maintain, on a consolidated basis, a minimum fixed charge coverage ratio, not to exceed a
maximum total lease adjusted leverage ratio and not to exceed a maximum cash capital expenditure limit. Our ability to borrow under our revolving credit facility depends on our compliance with these tests. Events beyond our control, including
changes in general economic and business conditions, may affect our ability to meet these tests. We cannot assure you that we will meet these tests in the future, or that our lenders will waive any failure to meet these tests.
The failure to comply with our debt covenants or the volatile credit and capital markets could have a material adverse effect on our financial
condition.
Our ability to manage our debt is dependent on our level of positive cash flow from company-operated and franchised restaurants, net of
costs. An economic downturn may negatively impact our cash flows. Credit and capital markets can be volatile, which could make it more difficult for us to refinance our existing debt or to obtain additional debt or equity financings in the future.
Such constraints could increase our costs of borrowing and could restrict our access to other potential sources of future liquidity. Our failure to comply with the debt covenants in our term loan and revolving credit facility or to have sufficient
liquidity to make interest and other payments required by our debt could result in a default of such debt and acceleration of our borrowings, which would have a material adverse effect on our business and financial condition. The lack of
availability or access to
build-to-suit
leases and equipment financing leases could result in a decreased number of new restaurants and have a negative impact on our
growth.
If the interest rate swaps entered into in connection with our credit facility prove ineffective, it could result in volatility in our
operating results, including potential losses, which could have a material adverse effect on our results of operations and cash flows.
As of
December 25, 2016, we have three interest rate swap contracts with one of our lenders under our current credit agreement to exchange our variable interest rate payment commitments for fixed interest rate payments on our term loans. On
May 17, 2013, we entered into an interest rate swap contract with a notional amount of $50.0 million, an effective date of November 30, 2015 and a termination date of September 29, 2017, under which we pay a fixed interest rate
of 1.3325% and receive the
one-month
LIBOR rate. Also on May 17, 2013, we entered into a second interest rate swap contract with a notional amount of $25.0 million, an effective date of May 31,
2013 and a termination date of May 31, 2017, under which we pay a fixed interest rate of 0.70125% and receive the
one-month
LIBOR rate. On October 26, 2015, we entered into a third interest rate swap
contract with a notional amount of $50.0 million, an effective date of October 30, 2015 and a termination date of October 31,
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2019, under which we pay a fixed interest rate of 1.115% and receive the
one-month
LIBOR rate. Early termination of these interest rate swap contracts may
result in payments by us and expiration of these swaps without replacement may result in increased interest payments by us, which could have a material adverse effect on our results of operations and cash flow.
We record the swaps at fair value, and are currently designated as an effective cash flow hedge under ASC 815,
Derivatives and Hedging
(ASC
815). Each fiscal quarter, we assess whether each derivative that qualifies for hedge accounting continues to be highly effective in offsetting changes in the cash flows of the hedged item and record in earnings any gains or losses resulting
from hedge ineffectiveness. The hedge provided by our swaps could prove to be ineffective for a number of reasons, including early retirement of our term loan, as is allowed under the credit facility, or in the event the counterparty to the interest
rate swaps are determined in the future to not be creditworthy. Any determination that the hedge created by the swaps is ineffective could have a material adverse effect on our results of operations and cash flows and result in volatility in our
operating results. In addition, any changes in relevant accounting standards relating to the swaps, especially ASC 815, could materially increase earnings volatility.
A prolonged economic downturn could materially affect us in the future.
The restaurant industry is dependent upon consumer discretionary spending. The recession from late 2007 to
mid-2009
reduced consumer confidence to historic lows, impacting the publics ability and desire to spend discretionary dollars as a result of job losses, home foreclosures, significantly reduced home values, investment losses, bankruptcies and reduced
access to credit, resulting in lower levels of customer traffic and lower average check sizes in our restaurants. If the economy experiences another significant decline, our business, results of operations and ability to comply with the terms of our
term loan and revolving credit facility could be materially adversely affected and may result in a deceleration of the number and timing of new restaurant openings by us and our franchisees. Deterioration in customer traffic or a reduction in
average check size would negatively impact our revenues and profitability and could result in reductions in staff levels, additional impairment charges and potential restaurant closures.
The interests of our franchisees may conflict with ours or yours in the future and we could face liability from our franchisees or related to our
relationship with our franchisees.
Franchisees, as independent business operators, may from time to time disagree with us and our strategies
regarding the business or our interpretation of our respective rights and obligations under the franchise agreement and the terms and conditions of the franchisee/franchisor relationship. This may lead to disputes with our franchisees and we expect
such disputes to occur from time to time in the future as we continue to offer franchises. Such disputes may result in legal action against us. To the extent we have such disputes, the attention, time and financial resources of our management and
our franchisees will be diverted from our restaurants, which could have a material adverse effect on our business, financial condition, results of operations and cash flows even if we have a successful outcome in the dispute.
In addition, various state and federal laws govern our relationship with our franchisees and our potential sale of a franchise. A franchisee and/or a
government agency may bring legal action against us based on the franchisee/franchisor relationships that could result in the award of damages to franchisees and/or the imposition of fines or other penalties against us.
Information technology system failures or breaches of our network security could interrupt our operations and adversely affect our business.
We and our franchisees rely on our computer systems and network infrastructure across our operations, including
point-of-sale
processing at our restaurants. Our and our franchisees operations depend upon our and our franchisees ability to protect our computer equipment and systems against damage from
physical theft, fire,
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power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses and other disruptive problems. Any damage or failure of our
computer systems or network infrastructure that causes an interruption in our operations could have a material adverse effect on our business and subject us or our franchisees to litigation or to actions by regulatory authorities.
We are continuing to expand, upgrade and develop our information technology capabilities, including the recent implementation of a new
point-of-sale
system for company-operated restaurants. If we are unable to successfully upgrade or expand our technological capabilities, we may not be able to take advantage
of market opportunities, manage our costs and transactional data effectively, satisfy customer requirements, execute our business plan or respond to competitive pressures. Additionally, unforeseen problems with our new
point-of-sale
system may affect our operational abilities and internal controls and we may incur additional costs in connection with such upgrades and expansion.
If we or our franchisees are unable to protect our customers credit and debit card data, we could be exposed to data loss, litigation, liability
and reputational damage.
In connection with credit and debit card sales, we and our franchisees transmit confidential credit and debit card
information by way of secure private retail networks. Although we and our franchisees use private networks, third parties may have the technology or
know-how
to breach the security of the customer information
transmitted in connection with credit and debit card sales, and our and our franchisees security measures and those of our and our franchisees technology vendors may not effectively prohibit others from obtaining improper access to this
information. If a person were able to circumvent these security measures, he or she could destroy or steal valuable information or disrupt our and our franchisees operations. Any security breach could expose us and our franchisees to risks of
data loss, litigation and liability and could seriously disrupt our and our franchisees operations and any resulting negative publicity could significantly harm our reputation.
The failure to enforce and maintain our trademarks and protect our other intellectual property could materially adversely affect our business, including
our ability to establish and maintain brand awareness.
We have registered
Bojangles
®
and certain other names used by our restaurants as trademarks or service marks with the United States Patent and Trademark Office. The Bojangles
®
trademark is also registered in some form in approximately 25 foreign countries. Our current brand campaign, Its Bo Time has also been approved for registration with the United
States Patent and Trademark Office. In addition, the Bojangles logo, website name and address and Facebook and Twitter accounts are our intellectual property. The success of our business strategy depends on our continued ability to use our
existing trademarks and service marks in order to increase brand awareness and develop our branded products. If our efforts to protect our intellectual property are not adequate, or if any third-party misappropriates or infringes on our intellectual
property, whether in print, on the Internet or through other media, the value of our brands may be harmed, which could have a material adverse effect on our business, including the failure of our brands and branded products to achieve and maintain
market acceptance. There can be no assurance that all of the steps we have taken to protect our intellectual property in the United States and in foreign countries will be adequate. In addition, the laws of some foreign countries do not protect
intellectual property rights to the same extent as do the laws of the United States.
We or our suppliers maintain the seasonings and additives for our
chicken, biscuits and other offerings, as well as certain standards, specifications and operating procedures, as trade secrets or confidential information. We may not be able to prevent the unauthorized disclosure or use of our trade secrets or
information, despite the existence of confidentiality agreements and other measures. While we try to ensure that the quality of our brand and branded products is maintained by all of our franchisees, we cannot be certain that these franchisees will
not take actions that adversely affect the value of our intellectual property or reputation. If any of our trade secrets or information were to be disclosed to or independently developed by a competitor, our business, financial condition and results
of operations could be materially adversely affected.
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Third-party claims with respect to intellectual property assets, if decided against us, may result in
competing uses or require adoption of new,
non-infringing
intellectual property, which may in turn adversely affect sales and revenues.
There can be no assurance that third parties will not assert infringement or misappropriation claims against us, or assert claims that our rights in our
trademarks, service marks, trade dress and other intellectual property assets are invalid or unenforceable. Any such claims could have a material adverse effect on us or our franchisees if such claims were to be decided against us. If our rights in
any intellectual property were invalidated or deemed unenforceable, it could permit competing uses of intellectual property which, in turn, could lead to a decline in restaurant revenues. If the intellectual property became subject to third-party
infringement, misappropriation or other claims, and such claims were decided against us, we may be forced to pay damages, be required to develop or adopt
non-infringing
intellectual property or be obligated to
acquire a license to the intellectual property that is the subject of the asserted claim. There could be significant expenses associated with the defense of any infringement, misappropriation, or other third-party claims.
We depend on our executive officers, the loss of whom could materially harm our business.
We rely upon the accumulated knowledge, skills and experience of our executive officers. Our executive officers have cumulative experience of more than 27
years with us and over 88 years in the food service industry. If they were to leave us or become incapacitated, we might suffer in our planning and execution of business strategy and operations, impacting our brand and financial results. We also do
not maintain any key man life insurance policies for any of our employees.
Matters relating to employment and labor law may adversely affect our
business.
Various federal and state labor laws govern our relationships with our employees and affect 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, including mandating increases in minimum wages, changes in exempt and
non-exempt
status, or mandated benefits such as health insurance could materially affect our business, financial condition, operating results or cash flow. Since we self-insure our medical plan, increased medical claims could negatively impact our margins, as
will the PPACA. Furthermore, if our or our franchisees employees unionize, it could materially affect our business, financial condition, operating results or cash flow.
We are also subject in the ordinary course of business to employee claims against us based, among other things, on discrimination, harassment, wrongful
termination, or violation of wage and labor laws, including a current lawsuit seeking class action status against us regarding overtime and exempt versus
non-exempt
status. Such claims could also be asserted
against us by employees of our franchisees. Moreover, claims asserted against franchisees may at times be made against us as a franchisor. These claims may divert our financial and management resources that would otherwise be used to benefit our
operations. The ongoing expense of any resulting lawsuits, and any substantial settlement payment or damage award against us, could adversely affect our business, brand image, employee recruitment, financial condition, operating results or cash
flows.
Restaurant companies have been the target of class action lawsuits and other proceedings alleging, among other things, violations of federal
and state workplace and employment laws. Proceedings of this nature are costly, divert management attention and, if successful, could result in our payment of substantial damages or settlement costs.
Our business is subject to the risk of litigation by employees, consumers, suppliers, franchisees, stockholders or others through private actions, class
actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action and regulatory actions, is difficult to assess or quantify. In
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recent years, restaurant companies, including us, have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state laws regarding workplace and employment
conditions, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and
state wage and hour laws regarding, among other things, employee meal deductions, overtime eligibility of managers and failure to pay for all hours worked. Though we do not believe any lawsuits in which we are currently involved will have a material
adverse effect on our financial position, results of operations, liquidity or capital resources, we may in the future be subject to lawsuits that could have such an effect.
Occasionally, our customers file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a
visit to one of our restaurants, including actions seeking damages resulting from food-borne illness or accidents in our restaurants. We are also subject to a variety of other claims from third parties arising in the ordinary course of our business,
including contract claims. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their customers. We may also be subject to lawsuits from our
employees, the U.S. Equal Employment Opportunity Commission or others alleging violations of federal and state laws regarding workplace and employment conditions, discrimination and similar matters.
Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our
operations and result in increases in our insurance premiums. In addition, they may generate negative publicity, which could reduce customer traffic and sales. Although we maintain what we believe to be adequate levels of insurance, insurance may
not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims or any adverse publicity resulting from claims could
adversely affect our business and results of operations.
If we or our franchisees face labor shortages or increased labor costs, our results of
operations and our growth could be adversely affected.
Labor is a primary component in the cost of operating our company-operated and franchised
restaurants. If we or our franchisees face labor shortages or increased labor costs because of increased competition for employees, higher employee turnover rates, unionization of restaurant workers, or increases in the federally-mandated or
state-mandated minimum wage, change in exempt and
non-exempt
status, or other employee benefits costs (including costs associated with health insurance coverage or workers compensation insurance), our
and our franchisees operating expenses could increase and our growth could be adversely affected.
We have a substantial number of hourly employees
who are paid wage rates at or based on the applicable federal or state minimum wage and increases in the minimum wage will increase our labor costs and the labor costs of our franchisees. The federal minimum wage has been $7.25 per hour since
July 24, 2009. Federally-mandated, state-mandated or locally-mandated minimum wages may be raised in the future. As of the date hereof, 29 states and the District of Columbia have set a minimum wage level higher than the federal minimum wage.
We may be unable to increase our menu prices in order to pass future increased labor costs on to our customers, in which case our margins would be negatively affected. Also, reduced margins of franchisees could make it more difficult to sell
franchises. If menu prices are increased by us and our franchisees to cover increased labor costs, the higher prices could adversely affect transactions which could lower sales and thereby reduce our margins and the royalties that we receive from
franchisees.
In addition, our success depends in part upon our and our franchisees ability to attract, motivate and retain a sufficient number of
well-qualified restaurant operators, management personnel and other employees. Qualified individuals needed to fill these positions can be in short supply in some geographic areas, and in fiscal 2016 some of our stores experienced increased
competition for qualified employees and were required to pay higher wages to hire employees. In addition, limited service restaurants have traditionally experienced relatively high
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employee turnover rates. Our turnover increased in both fiscal 2015 and fiscal 2016 at company-operated restaurants. Our and our franchisees ability to recruit and retain employees may
delay the planned openings of new restaurants or result in higher employee turnover in existing restaurants, which could increase our and our franchisees labor costs and have a material adverse effect on our business, financial condition,
results of operations or cash flows. If we or our franchisees are unable to recruit and retain sufficiently qualified individuals, our business and our growth could be adversely affected. Competition for these employees could require us or our
franchisees to pay higher wages, which could also result in higher labor costs.
During fiscal 2016, the Department of Labor (DOL) enacted
regulations related to overtime and exempt versus
non-exempt
classification that were scheduled to become effective December 1, 2016. Although the December 1, 2016 effective date was delayed, we
increased the salaries of certain of our team members, and if the regulations are ultimately implemented, we expect the overtime rules and/or changes in exempt versus non-exempt status will result in additional increases in labor costs for us and/or
our franchisees.
Finally, labor initiatives we or our franchisees implement across company-operated and franchised restaurants influence our labor costs.
Certain initiatives, such as the expansion of our table service at company-operated restaurants, will increase our labor costs and overall operating expenses, which could adversely affect our growth. Changing the mix of full-time and part-time team
members is another labor initiative that will influence our labor costs. Increasing our full-time team members at company-operated restaurants and/or franchised restaurants relative to part-time team members will result in higher labor costs for us
and/or our franchisees, which could adversely affect our growth.
We are locked into long-term and
non-cancelable
leases and may be unable to renew leases at the end of their terms.
Many of our restaurant
leases are
non-cancelable
and typically have initial terms up to between 15 and 20 years and three renewal terms of five years each that we may exercise at our option. Even if we close a restaurant, we are
required to perform our obligations under the applicable lease, which could include, among other things, a provision for a closed restaurant reserve when the restaurant is closed, which would impact our profitability, and payment of the base rent,
property taxes, insurance and maintenance for the balance of the lease term. In addition, in connection with leases for restaurants that we will continue to operate, we may, at the end of the lease term and any renewal period for a restaurant, be
unable to renew the lease without substantial additional cost, if at all. As a result, we may close or relocate the restaurant, which could subject us to construction and other costs and risks. Additionally, the revenues and profit, if any,
generated at a relocated restaurant may not equal the revenues and profit generated at the existing restaurant.
We and our franchisees are subject
to extensive government regulations that could result in claims leading to increased costs and restrict our ability to operate or sell franchises.
We and our franchisees are subject to extensive government regulation at the federal, state and local government levels. These include, but are not limited to,
regulations relating to the preparation and sale of food, zoning and building codes, franchising, land use and employee, health, sanitation and safety matters. We and our franchisees are required to obtain and maintain a wide variety of governmental
licenses, permits and approvals. Difficulty or failure in obtaining them in the future could result in delaying or canceling the opening of new restaurants. Local authorities may suspend or deny renewal of our governmental licenses if they determine
that our operations do not meet the standards for initial grant or renewal. This risk would be even higher if there were a major change in the licensing requirements affecting our types of restaurants.
The PPACA requires employers such as us to provide adequate and affordable health insurance for all qualifying employees or pay a monthly
per-employee
fee or penalty for
non-compliance
beginning in fiscal 2015. The PPACA increased our costs in providing health insurance for our employees beginning in fiscal
2015, and we expect additional increases in future years. We expect that increases in the penalty for
non-compliance
with the
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individual mandate will result in more employees enrolling in the health insurance offered by us and our costs in providing health insurance will increase.
We are also subject to regulation by the Federal Trade Commission and subject to state laws that govern the offer, sale, renewal and termination of franchises
and our relationship with our franchisees. The failure to comply with these laws and regulations in any jurisdiction or to obtain required approvals could result in a ban or temporary suspension on franchise sales, fines or the requirement that we
make a rescission offer to franchisees, any of which could affect our ability to open new restaurants in the future and thus could materially adversely affect our business and operating results. Any such failure could also subject us to liability to
our franchisees.
Compliance with environmental laws may negatively affect our business.
We are subject to federal, state and local laws and regulations, including those concerning waste disposal, pollution, protection of the environment, and the
presence, discharge, storage, handling, release and disposal of, and exposure to, hazardous or toxic substances. These environmental laws provide for significant fines and penalties for
non-compliance
and
liabilities for remediation, sometimes without regard to whether the owner or operator of the property knew of, or was responsible for, the release or presence of hazardous toxic substances. Third parties may also make claims against owners or
operators of properties for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such hazardous or toxic substances at, on or from our restaurants. Environmental conditions relating to the presence of
hazardous substances at prior, existing or future restaurant sites could materially adversely affect our business, financial condition and results of operations. Further, environmental laws and regulations, and the administration, interpretation and
enforcement thereof, are subject to change and may become more stringent in the future, each of which could materially adversely affect our business, financial condition and results of operations.
Legislation and regulations requiring the display and provision of nutritional information for our menu offerings, and new information or attitudes
regarding diet and health or adverse opinions about the health effects of consuming our menu offerings, could affect consumer preferences and negatively impact our results of operations.
Government regulation and consumer eating habits may impact our business as a result of changes in attitudes regarding diet and health or new information
regarding the health effects of consuming our menu offerings, including our buttermilk biscuits, legendary sweet tea and
bone-in
fried chicken. These changes have resulted in, and may continue to result in,
the enactment of laws and regulations that impact the ingredients and nutritional content of our menu offerings, or laws and regulations requiring us to disclose the nutritional content of our food offerings.
The PPACA establishes a uniform, federal requirement for certain restaurants to post certain nutritional information on their menus. Specifically, the PPACA
amended the Federal Food, Drug and Cosmetic Act to, as of May 5, 2017, require chain restaurants with 20 or more locations operating under the same name and offering substantially the same menus to publish the total number of calories of
standard menu items on menus and menu boards, along with a statement that puts this calorie information in the context of a total daily calorie intake. The PPACA also requires covered restaurants to, as of May 5, 2017, provide to consumers,
upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a statement on menus and menu boards about the availability of this information. The PPACA further permits the United States Food and
Drug Administration to require covered restaurants to make additional nutrient disclosures, such as disclosure of
trans-fat
content. An unfavorable report on, or reaction to, our menu ingredients, the size of
our portions or the nutritional content of our menu items could negatively influence the demand for our offerings.
Furthermore, a number of states,
counties and cities have enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information to customers, or have enacted legislation restricting the use of certain types of ingredients in restaurants.
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Compliance with current and future laws and regulations regarding the ingredients and nutritional content of our
menu items may be costly and time-consuming. Additionally, if consumer health regulations or consumer eating habits change significantly, we may be required to modify or discontinue certain menu items, and we may experience higher costs associated
with the implementation of those changes. Additionally, some government authorities are increasing regulations regarding trans-fats and sodium, which may require us to limit or eliminate trans-fats and sodium in our menu offerings or switch to
higher cost ingredients or may hinder our ability to operate in certain markets. Some jurisdictions have banned certain cooking ingredients, such as trans-fats, which a limited number of our menu products contain in small, but measurable amounts, or
have discussed banning certain products, such as large sodas. Removal of these products and ingredients from our menus could affect product tastes, customer satisfaction levels, and sales volumes, whereas if we fail to comply with these laws or
regulations, our business could experience a material adverse effect.
We cannot make any assurances regarding our ability to effectively respond to
changes in consumer health perceptions or our ability to successfully implement the nutrient content disclosure requirements and to adapt our menu offerings to trends in eating habits. The imposition of additional menu-labeling laws could have an
adverse effect on our results of operations and financial position, as well as on the restaurant industry in general.
We may become subject to
liabilities arising from environmental laws that could likely increase our operating expenses and materially and adversely affect our business and results of operations.
We are subject to federal, state and local laws, regulations and ordinances that:
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govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as waste handling and disposal practices for solid and hazardous wastes; and
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impose liability for the costs of cleaning up, and damage resulting from, sites of past spills, disposals or other releases of hazardous materials.
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In particular, under applicable environmental laws, we may be responsible for remediation of environmental conditions and may be subject to associated
liabilities, including liabilities for
clean-up
costs and personal injury or property damage, relating to our restaurants and the land on which our restaurants are located, regardless of whether we lease or
own the restaurants or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant. If we are found liable for the costs of remediating contamination at any of our properties, our
operating expenses would likely increase and our results of operations would be materially adversely affected. See BusinessEnvironmental Matters. Some of our leases provide for indemnification of our landlords for environmental
contamination,
clean-up
or owner liability.
We are exposed to the risk of natural disasters, unusual
weather conditions, pandemic outbreaks, political events, war and terrorism that could disrupt business and result in lower sales, increased operating costs and capital expenditures.
Our headquarters, company-operated and franchised restaurant locations, third-party sole distributor and its facilities, as well as certain of our vendors and
customers, are located in areas which have been and could be subject to natural disasters such as floods, hurricanes, tornadoes, fires or earthquakes. Adverse weather conditions or other extreme changes in the weather, including resulting electrical
and technological failures, especially such events which occur in North Carolina or South Carolina, as a result of the concentration of our restaurants, may disrupt our and our franchisees business and may adversely affect our and our
franchisees ability to obtain food and supplies and sell menu items. Our business may be harmed if our or our franchisees ability to obtain food and supplies and sell menu items is impacted by any such events, any of which could
influence customer trends and purchases and may negatively impact our and our franchisees revenues, properties or operations. Such events could result in physical damage to one or more of our or our franchisees properties, the temporary
closure of some or all of our company-operated restaurants, franchised restaurants and third-party sole distributor, the temporary lack of an adequate work force in a market, temporary or long-term
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disruption in the transport of goods, delay in the delivery of goods and supplies to our company-operated and franchised restaurants and third-party sole distributor, disruption of our technology
support or information systems, or fuel shortages or dramatic increases in fuel prices, all of which would increase the cost of doing business. These events also could have indirect consequences such as increases in the costs of insurance if they
result in significant loss of property or other insurable damage. Any of these factors, or any combination thereof, could adversely affect our operations.
Because of our international franchised restaurants, we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar
worldwide anti-bribery and anti-kickback laws.
We currently have three franchised locations located outside the United States. The U.S. Foreign
Corrupt Practices Act, and other similar anti-bribery and anti-kickback laws and regulations, generally prohibit companies and their intermediaries from making improper payments to
non-U.S.
officials for the
purpose of obtaining or retaining business. We cannot assure you that we will be successful in preventing our franchisees or other agents from taking actions in violation of these laws or regulations. Such violations, or allegations of such
violations, could disrupt our business and result in a material adverse effect on our financial condition, results of operations and cash flows.
Risks
Related to Ownership of Our Common Stock
If the ownership of our common stock continues to be highly concentrated, it may prevent minority
stockholders from influencing significant corporate decisions and may result in conflicts of interest.
Advent International Corporation
(Advent) indirectly beneficially owns approximately 52% of our outstanding common stock outstanding as of December 25, 2016. As a result, Advent indirectly beneficially owns shares sufficient for majority votes over all matters
requiring stockholder votes, including: the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; amendments to our certificate of
incorporation or our bylaws; and our winding up and dissolution.
This concentration of ownership may delay, deter or prevent acts that would be favored
by our other stockholders. The interests of Advent may not always coincide with our interests or the interests of our other stockholders. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in
control of us. Also, Advent may seek to cause us to take courses of action that, in its judgment, could enhance its investment in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders. As a
result, the market price of our common stock could decline or stockholders might not receive a premium over the then-current market price of our common stock upon a change in control. In addition, this concentration of share ownership may adversely
affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders.
The interests of Advent may conflict with ours or those of our other stockholders in the future.
Advent engages in a range of investing activities, including investments in restaurants and other consumer-related companies in particular. In the ordinary
course of its business activities, Advent may engage in activities where its interests conflict with our interests or those of our other stockholders. Our amended and restated certificate of incorporation contains provisions renouncing any interest
or expectancy held by our directors affiliated with Advent in certain corporate opportunities. Accordingly, the interests of Advent may supersede ours, causing them or their affiliates to compete against us or to pursue opportunities instead of us,
for which we have no recourse. Such actions on the part of Advent and inaction on our part could have a material adverse effect on our business, financial condition and results of operations. In addition, Advent may have an interest in pursuing
acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment in us, even though such transactions might involve risks to our stockholders, such as debt financed acquisitions.
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As a controlled company, we are not subject to all of the corporate governance rules of NASDAQ.
We are considered a controlled company under the rules of NASDAQ. Controlled companies are exempt from NASDAQ corporate governance
rules requiring that listed companies have (i) a majority of the board of directors consist of independent directors under the listing standards of NASDAQ, (ii) a nominating/corporate governance committee composed entirely of
independent directors and a written nominating/corporate governance committee charter meeting NASDAQ requirements and (iii) a compensation committee composed entirely of independent directors and a written compensation committee charter meeting
the requirements of NASDAQ. As a result of relying on certain of these exceptions, our nominating and corporate governance committee does not consist entirely of independent directors. While we have chosen not to rely on certain of the exceptions,
we may in the future choose to rely on such exceptions as long as we continue to be a controlled company. Accordingly, our stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate
governance requirements of NASDAQ.
Bojangles, Inc. is a holding company with no operations and relies on its operating subsidiaries to
provide it with funds necessary to meet its financial obligations and to pay dividends.
Bojangles, Inc. is a holding company with no
material direct operations. Bojangles, Inc.s principal assets are the equity interests it directly or indirectly holds in its operating subsidiaries which own our operating assets. As a result, Bojangles, Inc. is dependent on
loans, dividends and other payments from its operating subsidiaries to generate the funds necessary to meet its financial obligations and to pay dividends on its common stock. Its subsidiaries are legally distinct from Bojangles, Inc. and may
be prohibited or restricted from paying dividends, including the restrictions contained in our term loan and revolving credit facility described below, or otherwise making funds available to us under certain conditions. Although Bojangles,
Inc. does not expect to pay dividends on its common stock for the foreseeable future, if it is unable to obtain funds from its subsidiaries, it may be unable to, or its board may exercise its discretion not to, pay dividends.
We do not anticipate paying any dividends on our common stock in the foreseeable future.
We do not expect to declare or pay any cash or other dividends in the foreseeable future on our common stock because we intend to use cash flow generated by
operations to grow our business. Our term loan and revolving credit facility restrict our ability to pay cash dividends on our common stock. We may also enter into other credit agreements or other borrowing arrangements in the future that restrict
or limit our ability to pay cash dividends on our common stock. As a result, our stockholders may not receive any return on an investment in our common stock unless they sell our common stock for a price greater than that which they paid for it.
If we are unable to regain and maintain compliance with the requirements for continued listing on the NASDAQ Global Select Market, our common stock
may be delisted and the price of our common stock could be negatively impacted.
Our common stock is currently listed for trading on the NASDAQ
Global Select Market. We must satisfy NASDAQs continued listing requirements or risk delisting, which would have a material adverse effect on our business. On November 23, 2016, we were notified that Robert Alderson, a member of our board
of directors, had passed away. Mr. Alderson was also a member of the audit committee of our board of directors and, as a result of his passing, we are not in compliance with Rule 5605(c)(2)(A) of the NASDAQ, which requires that we maintain an
audit committee composed of at least three independent directors. Our board of directors is actively seeking to recruit a director to fill the vacancies on the board of directors and the audit committee resulting from Mr. Aldersons
passing and expects to regain compliance with Rule 5605(c)(2)(A) before the end of the cure period for such
non-compliance
as provided for by the listing rules of NASDAQ. However, there can be no
assurance that we will be able to regain compliance with NASDAQs listing requirements. A delisting of our common stock from the NASDAQ Global Select Market could materially reduce the liquidity of our common stock, resulting in a corresponding
material reduction in the price of our common stock, and may result in the potential loss of confidence by investors, suppliers, customers and employees and fewer business development opportunities.
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As a public company, we incur significant costs to comply with the laws and regulations affecting public
companies which could harm our business and results of operations.
As a public company, we are subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the Exchange Act), and the Sarbanes-Oxley Act of 2002, as amended (the Sarbanes-Oxley Act), and the listing requirements of NASDAQ, and other applicable securities rules and
regulations. These rules and regulations have increased and will continue to increase our legal, accounting and financial compliance costs and have made and will continue to make some activities more time consuming and costly, particularly after we
cease to be an emerging growth company as defined in the JOBS Act. For example, these rules and regulations could make it more difficult and more costly for us to obtain director and officer liability insurance, and we may be required to
accept reduced policy limits and coverage or to incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of
directors or our board committees or as executive officers. Our management and other personnel devote a substantial amount of time to these compliance initiatives. As a result, managements attention may be diverted from other business
concerns, which could harm our business and operating results. In fiscal 2015, we hired additional employees to comply with these requirements. Despite the increase in headcount, we will need to hire more employees in the future, which will further
increase our costs and expenses.
Our management team and other personnel devote a substantial amount of time to new compliance initiatives and we may not
successfully or efficiently manage our ongoing transition to a public company. To comply with the requirements of being a public company, including the Sarbanes-Oxley Act, we have undertaken and will continue to undertake various actions, such as
implementing new internal controls and procedures and hiring accounting or internal audit staff, which will require us to incur additional expenses and harm our results of operations.
Our management has limited experience managing a public company and our current resources may not be sufficient to fulfill our public company
obligations.
As a public company, we are subject to various regulatory requirements, including those of the SEC and NASDAQ. These requirements
include record keeping, financial reporting and corporate governance rules and regulations. Our management team has limited experience in managing a public company and, historically, has not had the resources typically found in a public company. Our
internal infrastructure may not be adequate to support our increased reporting obligations and we may be unable to hire, train or retain necessary staff and may be reliant on engaging outside consultants or professionals to overcome our lack of
experience or employees. Our business could be adversely affected if our internal infrastructure is inadequate, we are unable to engage outside consultants or are otherwise unable to fulfill our public company obligations.
If securities or industry analysts do not publish research, do not continue to publish research or publish inaccurate or unfavorable research about our
business, our stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that
industry or securities analysts publish about us or our business. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could
cause our stock price or trading volume to decline. Moreover, if our operating results do not meet the expectations of the investor community, or one or more of the analysts who cover our company downgrade our stock, our stock price could decline.
For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating
to accounting standards and disclosure about our executive compensation, that apply to other public companies.
We are an emerging growth
company, as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements
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that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation
requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a
non-binding
advisory vote on executive compensation and of stockholder approval of any golden parachute payments not previously approved. We take advantage of some of these exceptions, and we do not know if
some investors find our common stock less attractive as a result. The result may be a less-active trading market for our common stock and our stock price may be more volatile.
In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would
otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth
companies.
We could remain an emerging growth company until December 27, 2020 or until the earliest of (a) the last day of the
first fiscal year in which our annual gross revenues exceed $1 billion, (b) the date that we become a large accelerated filer as defined in Rule
12b-2
under the Exchange Act, which would
occur if the market value of our common stock that is held by
non-affiliates
exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on
which we have issued more than $1 billion in
non-convertible
debt securities in the preceding three-year period.
If we fail to establish and maintain an effective system of integrated internal controls, we may not be able to report our financial results accurately,
which could have a material adverse effect on our business, financial condition and results of operations.
Ensuring that we have adequate internal
financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that will need to be evaluated frequently. Section 404 of the Sarbanes-Oxley
Act requires public companies to conduct an annual review and evaluation of their internal controls and attestations by independent auditors regarding the effectiveness of internal controls. We currently qualify as an emerging growth company, and
thus, we are exempt from the auditors attestation requirement until such time as we no longer qualify as an emerging growth company. Regardless of whether we qualify as an emerging growth company, we still need to implement substantial control
systems and procedures in order to satisfy the reporting requirements under the Exchange Act and applicable NASDAQ requirements, among other items. Establishing these internal controls have been and will continue to be costly and may divert
managements attention.
Evaluation by us of our internal controls over financial reporting may identify material weaknesses that may cause us to be
unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of NASDAQ listing rules. There also could be a negative reaction in the financial
markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements also could suffer if we or our independent registered public accounting firm were to report
a material weakness in our internal controls over financial reporting. This could materially adversely affect our business, financial condition, results of operations and stock price.
The market price and trading volume of our common stock has been and may be volatile, which could result in rapid and substantial losses for our
stockholders, and you may lose all or part of your investment.
Prior to our IPO, there had been no public market for our common stock. Shares of
our common stock were sold in our IPO in May 2015 at a price of $19.00 per share. During fiscal year 2015, our common stock traded as high
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as $28.45 and as low as $14.70. During fiscal year 2016, our common stock traded as high as $20.15 and as low as $13.39. An active, liquid and orderly market for our common stock may not be
sustained, which could depress the trading price of our common stock or cause it to be highly volatile or subject to wide fluctuations. The market price of our common stock has and may continue to fluctuate or may decline significantly in the
future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:
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variations in our quarterly or annual operating results;
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changes in our earnings estimates (if provided) or differences between our actual financial and operating results and those expected by investors and analysts;
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the contents of published research reports about us or our industry or the failure of securities analysts to cover our common stock;
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additions or departures of key management personnel;
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any increased indebtedness we may incur in the future;
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announcements by us or others and developments affecting us;
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actions by institutional stockholders;
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litigation and governmental investigations;
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legislative or regulatory changes;
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judicial pronouncements interpreting laws and regulations;
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changes in government programs;
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changes in market valuations of similar companies;
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speculation or reports by the press or investment community with respect to us or our industry in general;
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announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments; and
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general market, political and economic conditions, including local conditions in the markets in which we operate.
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These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. The stock market in
general has from time to time experienced extreme price and volume fluctuations, including recently. In addition, in the past, following periods of volatility in the overall market and decreases in the market price of a companys securities,
securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our managements attention and resources.
Future offerings of debt or equity securities by us may adversely affect the market price of our common stock.
In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our common stock or by offering
debt or other equity securities, including senior or subordinated notes, debt securities convertible into equity or shares of preferred stock. Opening new company-operated restaurants in existing and new markets could require substantial additional
capital in excess of cash from operations. We would expect to finance the capital required for new company-operated restaurants through a combination of additional issuances of equity, corporate indebtedness, leases and cash from operations.
Issuing additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of
our existing stockholders or reduce the market price of our common
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stock or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets
prior to the holders of our common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion.
Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Our decision to issue
securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing, or nature of our future offerings. Thus, holders of our common stock bear the risk that our
future offerings may reduce the market price of our common stock and dilute their stockholdings in us.
The market price of our common stock could
be negatively affected by sales of substantial amounts of our common stock in the public markets.
As of December 25, 2016, we had 36,547,434
shares of common stock outstanding. Of our issued and outstanding shares, all common stock is freely transferable, except for any shares held by our affiliates, as that term is defined in Rule 144 under the Securities Act. Approximately
52% of our outstanding common stock as of December 25, 2016 is beneficially owned by Advent, and can be resold into the public markets in the future in accordance with the requirements of Rule 144.
Sales or distributions of substantial amounts of our common stock, or the perception that such sales or distributions could occur, may cause the market price
of our common stock to decline. A decline in the price of our common stock might impede our ability to raise capital through the issuance of additional common stock or other equity securities.
Pursuant to our stockholders agreement, certain of our stockholders may require us to file registration statements under the Securities Act at our
expense, covering resales of our common stock held by them or piggyback on a registration statement in certain circumstances. Any such sales, or the prospect of any such sales, could materially impact the market price of our common stock.
The future issuance of additional common stock in connection with the Amended and Restated 2011 Equity Incentive Plan, acquisitions or otherwise will
dilute all other stockholdings.
As of December 25, 2016, we had an aggregate of 105,596,164 shares of common stock authorized but unissued
and not reserved for issuance under the Amended and Restated 2011 Equity Incentive Plan (the Amended 2011 Plan). We may issue all of these shares of common stock without any action or approval by our stockholders, subject to certain
exceptions. Any common stock issued in connection with the Amended 2011 Plan, the exercise of outstanding stock options, or otherwise, would dilute the percentage ownership held investors.
Delaware law and our organizational documents, as well as our existing and future debt agreements, may impede or discourage a takeover, which could
deprive our investors of the opportunity to receive a premium for their shares.
We are a Delaware corporation, and the anti-takeover provisions of
Delaware law impose various impediments to the ability of a third-party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. In addition, provisions of our amended and restated certificate of
incorporation and bylaws may make it more difficult for, or prevent a third-party from, acquiring control of us without the approval of our board of directors. Among other things, these provisions:
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provide for a classified board of directors with staggered three-year terms;
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do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;
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delegate the sole power of a majority of the board of directors to fix the number of directors;
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provide the power of our board of directors to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
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authorize the issuance of blank check preferred stock without any need for action by stockholders;
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eliminate the ability of stockholders to call special meetings of stockholders;
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establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and
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provide that a 66
2
⁄
3
% supermajority vote will be required to amend or repeal provisions relating to, among other things, the
classification of the board of directors, the filling of vacancies on the board of directors and the advance notice requirements for stockholder proposals and director nominations.
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In addition, our term loan and revolving credit facility imposes, and we anticipate that documents governing our future indebtedness may impose, limitations
on our ability to enter into change of control transactions. Thereunder, the occurrence of a change of control transaction could constitute an event of default permitting acceleration of the indebtedness, thereby impeding our ability to enter into
certain transactions.
The foregoing factors, as well as the significant common stock ownership by Advent could impede a merger, takeover, or other
business combination, or discourage a potential investor from making a tender offer for our common stock, which, under certain circumstances, could reduce the market value of our common stock.
Our amended and restated bylaws designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions
and proceedings that may be initiated by our stockholders, which could limit our stockholders ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or other employees.
Our amended and restated bylaws provide that, subject to certain exceptions, unless we consent in writing to the selection of an alternative forum, the Court
of Chancery of the State of Delaware shall be the sole and exclusive forum for (A) any derivative action or proceeding brought on our behalf, (B) any action asserting a claim of breach of a fiduciary duty owed by any of our directors,
officers or other employees to us or our stockholders, (C) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or DGCL, our certificate of incorporation or our bylaws, or (D) any action
asserting a claim against us governed by the internal affairs doctrine. This choice of forum provision may limit a stockholders ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors,
officers, or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees. Alternatively, if a court were to find this provision of our amended and restated bylaws inapplicable to, or unenforceable
in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of
operations.