Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the consolidated financial condition and results of operations for Bojangles,
Inc. (Bojangles or the Company) should be read in conjunction with the financial statements of the Company and notes thereto included elsewhere in this Quarterly Report. In this Quarterly Report, unless the context
otherwise requires, references to we, us, and our mean the Company, together with its subsidiaries, on a consolidated basis.
Operating results for any one fiscal quarter are not necessarily indicative of results to be expected for any other fiscal quarter or for the fiscal year, and
our key performance indicators, as discussed below, may decrease for any future period. Unless otherwise stated, comparable restaurant sales and average unit volumes are presented on a system-wide basis, which means they include sales at both
company-operated restaurants and franchised restaurants. Franchise sales represent sales at all franchised restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our franchise royalty revenues include
royalties based on a percentage of franchise sales.
Overview
Bojangles is a highly differentiated and growing restaurant operator and franchisor dedicated to serving customers high-quality, craveable food made from
our Southern recipes. We opened our first store in Charlotte, North Carolina in 1977 and, as of June 26, 2016, have expanded our system-wide restaurants to 689 across eleven states, the District of Columbia and Roatan Island, Honduras. Our
system of restaurants, which includes both company-operated and franchised restaurants, generated approximately $306.1 million and $597.3 million of system-wide sales during the thirteen and twenty-six weeks ended June 26, 2016, respectively.
We offer fast-casual quality food and preparation combined with quick-service speed, convenience and value.
Key Performance Indicators
To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company restaurant
revenues, franchise royalty and other franchise revenues, system-wide average unit volumes (AUVs), comparable restaurant sales, restaurant openings and net income. In addition, we also evaluate Adjusted Net Income and Adjusted Diluted
Net Income per Share, EBITDA and Adjusted EBITDA, and restaurant contribution and restaurant contribution margin, which are considered to be non-GAAP financial measures.
Company Restaurant Revenues
Company restaurant
revenues consists of sales of food and beverages in company-operated restaurants. Company restaurant revenues in a period are influenced by several factors, including the number of operating weeks in such period, the number of open restaurants and
comparable restaurant sales growth.
Seasonal factors cause our revenues to fluctuate from quarter to quarter. Our revenues per restaurant are typically
lower in the first quarter. As a result, our quarterly and annual operating results and key performance indicators may fluctuate significantly.
Franchise Royalty and Other Franchise Revenues
Franchise royalty and other franchise revenues represents royalty income and initial and renewal franchise fees. While we expect the majority of our total
revenue growth will be driven by company-operated restaurants, our franchised restaurants and growth in franchise royalty and other franchise revenues remain an important part of our financial success.
19
System-wide Average Unit Volumes
We measure system-wide AUVs on a fiscal year basis and on a trailing twelve-month basis for each non-fiscal year-end period for system-wide restaurants. Annual
AUVs are calculated using the following methodology: first, we determine the domestic free-standing restaurants with both a drive-thru and interior seating that have been open for a full twelve-month period (excluding express units); and second, we
calculate the revenues for these restaurants and divide by the number of restaurants in that base to arrive at our AUV calculation. This methodology is similar for each trailing twelve-month period outside the fiscal year end.
|
|
|
|
|
|
|
|
|
|
|
Trailing Twelve Months Ended
|
|
(Dollar amounts in thousands)
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Average Unit Volumes
|
|
Total system-wide
|
|
$
|
1,830
|
|
|
|
1,819
|
|
Comparable Restaurant Sales
Comparable restaurant sales reflects the change in year-over-year sales for the comparable restaurant base. A restaurant enters our comparable restaurant base
the first full day of the month after being open for fifteen months using a mid-month convention. While we do not record franchised restaurant sales as revenues, our royalty revenues are calculated based on a percentage of franchised restaurant
sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Comparable Restaurant Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
0.9
|
%
|
|
|
3.3
|
%
|
|
|
1.8
|
%
|
|
|
5.1
|
%
|
Franchised
|
|
|
(0.2
|
)%
|
|
|
5.1
|
%
|
|
|
0.6
|
%
|
|
|
6.7
|
%
|
Total system-wide
|
|
|
0.2
|
%
|
|
|
4.4
|
%
|
|
|
1.1
|
%
|
|
|
6.0
|
%
|
Restaurant Openings
The number of restaurant openings reflects the number of restaurants opened during a particular reporting period. Before we open company-operated restaurants,
we incur preopening costs. System-wide, some of our restaurants open with an initial start-up period of higher than normal sales volume, which subsequently decreases to stabilized levels. Newly opened company-operated restaurants typically
experience normal inefficiencies such as higher food and supplies, labor and other direct operating costs and, as a result, restaurant contribution margins are typically lower during the start-up period of operations. In addition, newly opened
restaurants typically have high occupancy costs compared to existing restaurants. When entering new markets, we may be exposed to longer start-up times and lower contribution margins than reflected in our average historical experience.
20
The following is the number of Bojangles franchised,
company-operated
and system-wide restaurants at the beginning and end of the thirteen and twenty-six weeks ended June 26, 2016:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
June 26, 2016
|
|
|
June 26, 2016
|
|
|
|
Franchised
|
|
|
Company-
Operated
|
|
|
System-
Wide
|
|
|
Franchised
|
|
|
Company-
Operated
|
|
|
System-
Wide
|
|
Restaurants at the beginning of the period
|
|
|
383
|
|
|
|
288
|
|
|
|
671
|
|
|
|
381
|
|
|
|
281
|
|
|
|
662
|
|
Opened during the period
|
|
|
11
|
|
|
|
7
|
|
|
|
18
|
|
|
|
13
|
|
|
|
14
|
|
|
|
27
|
|
Closed during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refranchised during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants at the end of the period
|
|
|
394
|
|
|
|
295
|
|
|
|
689
|
|
|
|
394
|
|
|
|
295
|
|
|
|
689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income, Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA
We consider net income to be a key performance indicator that shows the overall health of our entire business. We typically utilize net income in conjunction
with the non-GAAP financial measures Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA when assessing the operational strength and the performance of our business.
Adjusted Net Income represents company net income before items that we do not consider representative of our ongoing operating performance, as well as an
estimate of recurring incremental legal, accounting, insurance and other operating and compliance costs we expect to incur as a public company for those periods where they had not yet been incurred, both as identified in the reconciliation table
below. Adjusted Diluted Net Income per Share represents company diluted net income per share before items that we do not consider representative of our ongoing operating performance, as well as an estimate of recurring incremental legal, accounting,
insurance and other operating and compliance costs we expect to incur as a public company for those periods where they had not yet been incurred, both as identified in the reconciliation table below.
EBITDA represents company net income before interest expense (net of interest income), provision for income taxes and depreciation and amortization. Adjusted
EBITDA represents company net income before interest expense (net of interest income), provision for income taxes, depreciation and amortization, items that we do not consider representative of our ongoing operating performance and certain non-cash
items, as identified in the reconciliation table below.
Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA as
presented in this Form 10-Q are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA are not
measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with GAAP or as alternatives to cash flow from operating
activities as a measure of our liquidity. In addition, in evaluating Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added
back to calculate Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA. Our presentation of Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA should not be construed as an
inference that our future results will be unaffected by unusual or non-recurring items.
21
Adjusted Net Income, Adjusted Diluted Net Income per share, EBITDA and Adjusted EBITDA have limitations as
analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for
capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and
Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our
statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, and (vii) other companies in our industry may calculate these measures
differently than we do, limiting their usefulness as comparative measures.
We compensate for these limitations by providing specific information
regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.
We believe Adjusted Net Income, Adjusted Diluted Net Income per Share, EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to
period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary significantly among similar companies. These potential differences may be caused by variations in
capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative
depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we
believe investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally as benchmarks to evaluate our operating performance or compare our performance
to that of our competitors.
22
The following tables set forth reconciliations of net income to Adjusted Net Income and diluted net income per
share to Adjusted Diluted Net Income per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
(Dollar amounts in thousands)
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Net income
|
|
$
|
10,031
|
|
|
|
6,334
|
|
|
|
17,875
|
|
|
|
9,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain professional and transaction costs
(a)
|
|
|
9
|
|
|
|
2,007
|
|
|
|
42
|
|
|
|
4,880
|
|
Incremental public company costs
(b)
|
|
|
|
|
|
|
(194
|
)
|
|
|
|
|
|
|
(794
|
)
|
Vesting of performance-based stock options
(c)
|
|
|
|
|
|
|
707
|
|
|
|
|
|
|
|
707
|
|
Payroll taxes associated with stock option
exercises
(d)
|
|
|
51
|
|
|
|
17
|
|
|
|
71
|
|
|
|
17
|
|
Distributor transition costs
(e)
|
|
|
16
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
Tax impact of adjustments
(f)
|
|
|
(29
|
)
|
|
|
(283
|
)
|
|
|
(74
|
)
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
47
|
|
|
|
2,254
|
|
|
|
120
|
|
|
|
4,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income
|
|
$
|
10,078
|
|
|
|
8,588
|
|
|
|
17,995
|
|
|
|
14,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Diluted net income per share
|
|
$
|
0.27
|
|
|
|
0.17
|
|
|
|
0.48
|
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain professional and transaction costs
(a)
|
|
|
|
|
|
|
0.06
|
|
|
|
|
|
|
|
0.13
|
|
Incremental public company costs
(b)
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
(0.02
|
)
|
Vesting of performance-based stock options
(c)
|
|
|
|
|
|
|
0.02
|
|
|
|
|
|
|
|
0.02
|
|
Payroll taxes associated with stock option
exercises
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributor transition costs
(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax impact of adjustments
(f)
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
|
|
|
|
0.06
|
|
|
|
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Diluted Net Income per Share
|
|
$
|
0.27
|
|
|
|
0.23
|
|
|
|
0.48
|
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes costs associated with third-party consultants for one-time projects, public offering expenses and certain professional fees and transaction costs related to financing transactions. We could incur similar
expenses in future periods if we commence additional public offerings, financing transactions or other one-time projects.
|
(b)
|
Reflects an estimate of recurring incremental legal, accounting, insurance and other operating and compliance costs we expect to incur as a public company in addition to actual amounts incurred. By its nature, this
adjustment involves risks and uncertainties, and the actual costs incurred could be different than this adjustment. No adjustments will be made beyond the second fiscal quarter 2016 since the one year anniversary of our initial public offering
(IPO) occurred during the thirteen weeks ended June 26, 2016.
|
(c)
|
Includes non-cash, stock-based compensation related to the vesting of certain performance-based stock option awards. We could incur similar expenses in future periods upon the achievement of the performance metrics
indicated in the stock option grants.
|
(d)
|
Represents payroll taxes associated with stock option exercises related to stock options that were outstanding prior to our IPO. We expect to incur similar expenses in future periods when our directors or employees
exercise stock options that were outstanding prior to our IPO.
|
(e)
|
Includes expenses incurred in connection with the transition to our new distributor.
|
(f)
|
Represents the income tax (expense) benefit associated with the adjustments in (a) through (e) that are deductible for income tax purposes.
|
23
The following table sets forth reconciliations of net income to EBITDA and Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
(Dollar amounts in thousands)
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Net income
|
|
$
|
10,031
|
|
|
|
6,334
|
|
|
|
17,875
|
|
|
|
9,772
|
|
Income taxes
|
|
|
5,816
|
|
|
|
4,435
|
|
|
|
9,874
|
|
|
|
8,080
|
|
Interest expense, net
|
|
|
1,935
|
|
|
|
2,166
|
|
|
|
3,959
|
|
|
|
4,387
|
|
Depreciation and amortization
(a)
|
|
|
4,062
|
|
|
|
3,636
|
|
|
|
8,009
|
|
|
|
7,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
21,844
|
|
|
|
16,571
|
|
|
|
39,717
|
|
|
|
29,392
|
|
Non-cash rent
(b)
|
|
|
394
|
|
|
|
390
|
|
|
|
771
|
|
|
|
779
|
|
Stock-based compensation
(c)
|
|
|
272
|
|
|
|
1,063
|
|
|
|
549
|
|
|
|
1,402
|
|
Payroll taxes associated with stock option exercises
(d)
|
|
|
51
|
|
|
|
17
|
|
|
|
71
|
|
|
|
17
|
|
Preopening expenses
(e)
|
|
|
379
|
|
|
|
438
|
|
|
|
596
|
|
|
|
739
|
|
Sponsor and board member fees and expenses
(f)
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
166
|
|
Certain professional, transaction and other costs
(g)
|
|
|
9
|
|
|
|
2,007
|
|
|
|
42
|
|
|
|
4,880
|
|
Distributor transition costs
(h)
|
|
|
16
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
Impairment and dispositions
(i)
|
|
|
237
|
|
|
|
25
|
|
|
|
248
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
23,202
|
|
|
|
20,549
|
|
|
|
42,075
|
|
|
|
37,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes amortization of deferred debt issuance costs.
|
(b)
|
Includes deferred rent, which represents the extent to which our rent expense has been above or below our cash rent payments, amortization of favorable (unfavorable) leases and closed store reserves for rent net of cash
payments. We expect to continue to incur similar expenses in future periods as we record rent expense in accordance with GAAP, as well as continue to amortize favorable (unfavorable) leases and record closed store reserves.
|
(c)
|
Represents non-cash, stock-based compensation. We expect to incur similar expenses in future periods as we record stock-based compensation related to existing grants (and any potential future grants) in accordance with
GAAP.
|
(d)
|
Represents payroll taxes associated with stock option exercises related to stock options that were outstanding prior to our IPO. We expect to incur similar expenses in future periods when our directors or employees
exercise stock options that were outstanding prior to our IPO.
|
(e)
|
Includes expenses directly associated with the opening of company-operated restaurants and incurred prior to the opening of a company-operated restaurant. We expect to continue to incur similar expenses as we open
company-operated restaurants.
|
(f)
|
Includes reimbursement of expenses to our sponsor prior to our IPO and compensation and expense reimbursement to members of our board prior to our IPO.
|
(g)
|
Includes costs associated with third-party consultants for one-time projects, public offering expenses and certain professional fees and transaction costs related to financing transactions. We could incur similar
expenses in future periods if we commence additional public offerings, financing transactions or other one-time projects.
|
(h)
|
Includes expenses incurred in connection with the transition to our new distributor.
|
(i)
|
Includes loss (gain) on disposal of property and equipment, impairment and cash proceeds on disposals from disposition of property and equipment. We could continue to record impairment expense in future periods if
performance of company-operated restaurants is not sufficient to recover the carrying amount of the related long-lived assets. We expect to incur future losses (gains) and to receive cash proceeds on disposal of property and equipment associated
with retirement, replacement or write-off of fixed assets.
|
24
Restaurant Contribution and Restaurant Contribution Margin
Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution is defined
as company restaurant revenues less food and supplies costs, restaurant labor costs, and operating costs. We expect restaurant contribution to increase based on company-operated restaurants we open and our comparable restaurant sales growth.
Restaurant contribution margin is defined as restaurant contribution as a percentage of company restaurant revenues. Fluctuations in restaurant contribution and restaurant contribution margin can be attributed to company comparable restaurant sales
growth, sales volumes of newly opened company restaurants, and changes in company food and supplies costs, restaurant labor costs and operating costs.
Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our company-operated restaurants and our
calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis
of our results as reported under GAAP. We believe that restaurant contribution and restaurant contribution margin are important tools for investors as they are widely-used metrics within the restaurant industry to evaluate restaurant-level
productivity, efficiency and performance. We use restaurant contribution and restaurant contribution margin as key metrics to evaluate profitability and performance of our restaurants across periods and to evaluate our restaurant financial
performance compared to our competitors.
The following table reconciles our restaurant contribution to the line item on the condensed consolidated
statements of operations and comprehensive income entitled Company restaurant revenues, which we believe is the most directly comparable GAAP measure on our condensed consolidated statements of operations and comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Twenty-Six Weeks Ended
|
|
(Dollar amounts in thousands)
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Company restaurant revenues
|
|
$
|
124,674
|
|
|
|
114,043
|
|
|
|
246,088
|
|
|
|
222,378
|
|
Food and supplies costs
|
|
|
(39,020
|
)
|
|
|
(36,724
|
)
|
|
|
(77,541
|
)
|
|
|
(73,285
|
)
|
Restaurant labor costs
|
|
|
(34,525
|
)
|
|
|
(31,178
|
)
|
|
|
(67,861
|
)
|
|
|
(61,647
|
)
|
Operating costs
|
|
|
(26,607
|
)
|
|
|
(24,312
|
)
|
|
|
(55,020
|
)
|
|
|
(48,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant contribution
|
|
$
|
24,522
|
|
|
|
21,829
|
|
|
|
45,666
|
|
|
|
39,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant contribution margin
|
|
|
19.7
|
%
|
|
|
19.1
|
%
|
|
|
18.6
|
%
|
|
|
17.7
|
%
|
Key Financial Definitions
Total Revenues
Our revenues are derived from two
primary sources: company restaurant revenues and franchise revenues. Franchise revenues are comprised of franchise royalty revenues and, to a lesser extent, other franchise revenues, which include initial and renewal franchisee fees.
Food and Supplies Costs
Food and supplies costs
include the direct costs associated with food, beverage and packaging of our menu items at company-operated restaurants. The components of food and supplies are variable in nature, change with sales volume, are affected by menu mix and are subject
to fluctuations in commodity costs.
25
Restaurant Labor Costs
Restaurant labor costs, including preopening labor, consist of company-operated restaurant-level management and hourly labor costs, including salaries, wages,
payroll taxes, workers compensation expense, benefits and bonuses paid to our company-operated restaurant-level team members. Like other cost items, we expect restaurant labor costs at our company-operated restaurants to grow due to inflation
and as our company restaurant revenues grows. Factors that influence labor costs include minimum wage and employer payroll tax legislation, exempt versus non-exempt classification, a tightening labor market, employee turnover levels, health care
costs and the performance of our restaurants. In addition, the Patient Protection and Affordable Care Act (PPACA) has increased health care costs for our restaurants, and we expect the PPACA will continue to result in increased health
care costs for our restaurants in the future. We expect that the newly enacted Department of Labor (DOL) regulations related to overtime and exempt versus non-exempt classification that are scheduled to become effective December 1,
2016, along with various labor initiatives we intend to implement, including table service and potentially employing more full-time versus part-time team members, will increase our restaurant labor costs.
Operating Costs
Restaurant operating costs
include all other company-operated restaurant-level operating expenses, such as repairs and maintenance, utilities, credit and debit card processing, occupancy expenses and other restaurant operating costs. In addition, our advertising costs are
included in operating costs and are comprised of our company-operated restaurants portion of spending on all advertising which includes, but is not limited to, television, radio, social media, billboards, point-of-sale materials, sponsorships,
and creation of media, such as commercials and marketing campaigns.
Company Restaurant Depreciation and Amortization
Company restaurant depreciation and amortization primarily consists of the depreciation of property and equipment and amortization of intangible assets at the
restaurant level. We expect that growth in company-operated restaurant count, as well investments in technology and other initiatives, will increase company restaurant depreciation and amortization.
General and Administrative Expenses
General and
administrative expenses include expenses associated with corporate and administrative functions that support our operations, including compensation and benefits, travel expense, stock-based compensation expense, legal and professional fees,
training, and other corporate costs. We expect we will incur incremental general and administrative expenses as a result of our IPO and as a public company.
Other Depreciation and Amortization
Other
depreciation and amortization primarily consists of the depreciation of property and equipment and amortization of intangible assets not directly located at company-operated restaurants. We expect that growth in system-wide restaurant count, as well
investments in technology and other initiatives, will increase other depreciation and amortization.
Impairment
Long-lived assets such as property, equipment and intangible assets are reviewed on a unit-by-unit basis for impairment. When circumstances indicate a carrying
value of the assets may not be recoverable, an appropriate impairment is recorded. Impairments could increase if performance of company-operated restaurants is not sufficient to recover the carrying amount of the related long-lived assets.
Loss (Gain) on Disposal of Property and Equipment
Loss (gain) on disposal of property and equipment includes the net loss (gain) on disposal of assets related to retirements and replacements or write-off of
leasehold improvements, equipment and other fixed assets. These losses (gains) are related to normal disposals in the ordinary course of business and gains from insurance proceeds, if any.
26
Amortization of Deferred Debt Issuance Costs
Deferred debt issuance costs are amortized over the term of the related debt on the effective interest method.
Interest Expense
Interest expense primarily
consists of interest on our debt outstanding under our credit facility and capital lease obligations.
Income Taxes
Income taxes represent federal, state, and local current and deferred income tax expense.
27
Results of Operations
Thirteen Weeks Ended June 26, 2016 Compared with the Thirteen Weeks Ended June 28, 2015
Our operating results for the thirteen weeks ended June 26, 2016 and June 28, 2015 are compared below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
Increase/
(Decrease)
|
|
|
Percentage
Change
|
|
|
|
(Dollar amounts in thousands)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$
|
124,674
|
|
|
$
|
114,043
|
|
|
$
|
10,631
|
|
|
|
9.3
|
%
|
Franchise royalty revenues
|
|
|
6,621
|
|
|
|
6,368
|
|
|
|
253
|
|
|
|
4.0
|
%
|
Other franchise revenues
|
|
|
300
|
|
|
|
105
|
|
|
|
195
|
|
|
|
185.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
131,595
|
|
|
|
120,516
|
|
|
|
11,079
|
|
|
|
9.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant operating expenses:
|
|
|
|
|
|
|
|
|
Food and supplies costs
|
|
|
39,020
|
|
|
|
36,724
|
|
|
|
2,296
|
|
|
|
6.3
|
%
|
Restaurant labor costs
|
|
|
34,525
|
|
|
|
31,178
|
|
|
|
3,347
|
|
|
|
10.7
|
%
|
Operating costs
|
|
|
26,607
|
|
|
|
24,312
|
|
|
|
2,295
|
|
|
|
9.4
|
%
|
Depreciation and amortization
|
|
|
3,124
|
|
|
|
2,714
|
|
|
|
410
|
|
|
|
15.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant operating expenses
|
|
|
103,276
|
|
|
|
94,928
|
|
|
|
8,348
|
|
|
|
8.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income before other operating expenses
|
|
|
28,319
|
|
|
|
25,588
|
|
|
|
2,731
|
|
|
|
10.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
9,402
|
|
|
|
11,717
|
|
|
|
(2,315
|
)
|
|
|
(19.8
|
)%
|
Depreciation and amortization
|
|
|
716
|
|
|
|
691
|
|
|
|
25
|
|
|
|
3.6
|
%
|
Impairment
|
|
|
187
|
|
|
|
|
|
|
|
187
|
|
|
|
n/m
|
|
Loss on disposal of property and equipment
|
|
|
10
|
|
|
|
14
|
|
|
|
(4
|
)
|
|
|
(28.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
10,315
|
|
|
|
12,422
|
|
|
|
(2,107
|
)
|
|
|
(17.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
18,004
|
|
|
|
13,166
|
|
|
|
4,838
|
|
|
|
36.7
|
%
|
Amortization of deferred debt issuance costs
|
|
|
(222
|
)
|
|
|
(231
|
)
|
|
|
9
|
|
|
|
(3.9
|
)%
|
Interest income
|
|
|
2
|
|
|
|
5
|
|
|
|
(3
|
)
|
|
|
(60.0
|
)%
|
Interest expense
|
|
|
(1,937
|
)
|
|
|
(2,171
|
)
|
|
|
234
|
|
|
|
(10.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
15,847
|
|
|
|
10,769
|
|
|
|
5,078
|
|
|
|
47.2
|
%
|
Income taxes
|
|
|
5,816
|
|
|
|
4,435
|
|
|
|
1,381
|
|
|
|
31.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,031
|
|
|
$
|
6,334
|
|
|
$
|
3,697
|
|
|
|
58.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/m = not meaningful
Company Restaurant Revenues
Company restaurant
revenues increased $10.6 million, or 9.3%, during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015. The growth in company restaurant revenues was primarily due to an increase in comparable company
restaurant sales of $1.0 million, or 0.9%, composed of increases in price and transactions at our comparable restaurants, and an increase in the non-comparable restaurant base (net additions of 28 company-operated restaurants as of June 26,
2016 compared to June 28, 2015) accounting for $9.6 million.
Franchise Royalty Revenues
Franchise royalty revenues increased $0.3 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015.
The increase was primarily due to a net additional 15 franchised restaurants at June 26, 2016 compared to June 28, 2015, partially offset by a reduction in franchised comparable restaurant sales of 0.2%.
28
Other Franchise Revenues
Other franchise revenues increased $0.2 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015. The
increase was primarily due to the timing of the opening of franchised restaurants.
Food and Supplies Costs
Food and supplies costs increased $2.3 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015. This
increase was primarily driven by an increase in company restaurant revenues. Food and supplies costs as a percentage of company restaurant revenues during the thirteen weeks ended June 26, 2016 was 31.3% versus 32.2% during the thirteen weeks
ended June 28, 2015. This percentage decrease was primarily due to our menu price increases and lower commodity costs.
Restaurant Labor Costs
Company-operated restaurant labor increased $3.3 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended
June 28, 2015, primarily due to higher company restaurant revenues as a result of an increase in the number of company-operated restaurants. As a percentage of company restaurant revenues, restaurant labor costs increased to 27.7% from 27.3%.
This increase was primarily driven by an increase in direct labor, partially offset by lower medical claims, incentive compensation and payroll taxes.
We
expect our restaurant labor costs will continue to increase due to the tightening labor market, as well as certain labor initiatives across company-operated restaurants, including the expansion of our table service and potentially increasing the
number of full-time versus part-time team members. In addition, we expect that our restaurant labor costs will increase as a result of the newly enacted DOL regulations related to overtime and exempt versus non-exempt classification that are
scheduled to become effective December 1, 2016.
Operating Costs
Operating costs increased $2.3 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015, primarily
due to higher company restaurant revenues, partially offset by the timing of certain marketing expenses. As a percentage of company restaurant revenues, operating costs were 21.3% for both of the thirteen weeks ended June 26, 2016 and
June 28, 2015. Operating costs as a percentage of company restaurant revenues remained constant as the increase in operating costs attributable to higher occupancy and utilities costs was offset by lower marketing costs.
Restaurant Depreciation and Amortization
Restaurant depreciation and amortization increased $0.4 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended
June 28, 2015, due primarily to the increased number of company-operated restaurants and our new point-of-sale system. As a percentage of company restaurant revenues, depreciation and amortization was 2.5% and 2.4% during the thirteen weeks
ended June 26, 2016 and June 28, 2015, respectively.
General and Administrative Expenses
General and administrative expenses decreased $2.3 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended
June 28, 2015. The decrease was due primarily to $1.8 million in legal, accounting and other expenses incurred during the thirteen weeks ended June 28, 2015 directly related to public offering expenses, $0.8 million of lower stock-based
compensation expense primarily as a result of the vesting of certain performance awards during the thirteen weeks ended June 28, 2015 and $0.4 million of lower meetings and convention expenses primarily due to our bi-annual franchise convention
and unit director leadership conference occurring during the thirteen weeks ended June 28, 2015, partially offset by headcount added to support an increased number of restaurants in our system and additional costs as a result of operating as a
public company. As a percentage of total revenues, general and administrative expenses were 7.1% and 9.7% during the thirteen weeks ended June 26, 2016 and June 28, 2015, respectively.
29
We expect our recurring general and administrative expenses will continue to increase as we grow our business and
incur additional expenses related to being a newer public company.
Interest Expense
Interest expense decreased $0.2 million during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015. The
decrease was due primarily to principal payments of $33.2 million on our long-term debt and a reduction in our applicable rate, partially offset by an increase in the LIBOR rate and interest expense associated with interest rate swaps.
Income Taxes
Income taxes increased $1.4 million
during the thirteen weeks ended June 26, 2016 compared to the thirteen weeks ended June 28, 2015. Our effective income tax rates were 36.7% and 41.2% during the thirteen weeks ended June 26, 2016 and June 28, 2015, respectively.
The decrease in our effective income tax rate was primarily due to expenses incurred during the thirteen weeks ended June 28, 2015 related to the IPO for which we did not receive a tax deduction, partially offset by additional tax credits
recorded in the thirteen weeks ended June 28, 2015 versus the thirteen weeks ended June 26, 2016.
30
Twenty-Six Weeks Ended June 26, 2016 Compared with the Twenty-Six Weeks Ended June 28, 2015
Our operating results for the twenty-six weeks ended June 26, 2016 and June 28, 2015 are compared below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
|
Increase/
(Decrease)
|
|
|
Percentage
Change
|
|
|
|
(Dollar amounts in thousands)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$
|
246,088
|
|
|
$
|
222,378
|
|
|
$
|
23,710
|
|
|
|
10.7
|
%
|
Franchise royalty revenues
|
|
|
12,793
|
|
|
|
12,305
|
|
|
|
488
|
|
|
|
4.0
|
%
|
Other franchise revenues
|
|
|
370
|
|
|
|
480
|
|
|
|
(110
|
)
|
|
|
(22.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
259,251
|
|
|
|
235,163
|
|
|
|
24,088
|
|
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant operating expenses:
|
|
|
|
|
|
|
|
|
Food and supplies costs
|
|
|
77,541
|
|
|
|
73,285
|
|
|
|
4,256
|
|
|
|
5.8
|
%
|
Restaurant labor costs
|
|
|
67,861
|
|
|
|
61,647
|
|
|
|
6,214
|
|
|
|
10.1
|
%
|
Operating costs
|
|
|
55,020
|
|
|
|
48,183
|
|
|
|
6,837
|
|
|
|
14.2
|
%
|
Depreciation and amortization
|
|
|
6,207
|
|
|
|
5,388
|
|
|
|
819
|
|
|
|
15.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant operating expenses
|
|
|
206,629
|
|
|
|
188,503
|
|
|
|
18,126
|
|
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income before other operating expenses
|
|
|
52,622
|
|
|
|
46,660
|
|
|
|
5,962
|
|
|
|
12.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
18,912
|
|
|
|
22,630
|
|
|
|
(3,718
|
)
|
|
|
(16.4
|
)%
|
Depreciation and amortization
|
|
|
1,433
|
|
|
|
1,350
|
|
|
|
83
|
|
|
|
6.1
|
%
|
Impairment
|
|
|
389
|
|
|
|
15
|
|
|
|
374
|
|
|
|
n/m
|
|
(Gain) loss on disposal of property and equipment
|
|
|
(189
|
)
|
|
|
11
|
|
|
|
(200
|
)
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
20,545
|
|
|
|
24,006
|
|
|
|
(3,461
|
)
|
|
|
(14.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
32,077
|
|
|
|
22,654
|
|
|
|
9,423
|
|
|
|
41.6
|
%
|
Amortization of deferred debt issuance costs
|
|
|
(369
|
)
|
|
|
(415
|
)
|
|
|
46
|
|
|
|
(11.1
|
)%
|
Interest income
|
|
|
3
|
|
|
|
5
|
|
|
|
(2
|
)
|
|
|
(40.0
|
)%
|
Interest expense
|
|
|
(3,962
|
)
|
|
|
(4,392
|
)
|
|
|
430
|
|
|
|
(9.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
27,749
|
|
|
|
17,852
|
|
|
|
9,897
|
|
|
|
55.4
|
%
|
Income taxes
|
|
|
9,874
|
|
|
|
8,080
|
|
|
|
1,794
|
|
|
|
22.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,875
|
|
|
$
|
9,772
|
|
|
$
|
8,103
|
|
|
|
82.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/m = not meaningful
Company Restaurant Revenues
Company restaurant
revenues increased $23.7 million, or 10.7%, during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015. The growth in company restaurant revenues was primarily due to an increase in comparable
company restaurant sales of $3.8 million, or 1.8%, composed of increases in price and transactions at our comparable restaurants, and an increase in the non-comparable restaurant base (net additions of 28 company-operated restaurants as of
June 26, 2016 compared to June 28, 2015) accounting for $19.9 million.
Franchise Royalty Revenues
Franchise royalty revenues increased $0.5 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28,
2015. The increase was primarily due to a net additional fifteen franchised restaurants at June 26, 2016 compared to June 28, 2015 and franchised comparable restaurant sales growth of 0.6%.
31
Other Franchise Revenues
Other franchise revenues decreased $0.1 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015.
The decrease was primarily due to the timing of the opening of franchised restaurants.
Food and Supplies Costs
Food and supplies costs increased $4.3 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015.
This increase was primarily driven by an increase in company restaurant revenues. Food and supplies costs as a percentage of company restaurant revenues during the twenty-six weeks ended June 26, 2016 was 31.5% versus 33.0% during the
twenty-six weeks ended June 28, 2015. This percentage decrease was primarily due to our menu price increases and lower commodity costs.
Restaurant Labor Costs
Company-operated
restaurant labor increased $6.2 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015, primarily due to higher company restaurant revenues as a result of an increase in the number of
company-operated restaurants. As a percentage of company restaurant revenues, restaurant labor costs decreased to 27.6% from 27.7%. This decrease was primarily driven by lower medical claims, incentive compensation and payroll taxes, partially
offset by an increase in direct labor costs.
We expect our restaurant labor costs will continue to increase due to the tightening labor market, as well
as certain labor initiatives across company-operated restaurants, including the expansion of our table service and potentially increasing the number of full-time versus part-time team members. In addition, we expect our restaurant labor costs will
increase as a result of the newly enacted DOL regulations related to overtime and exempt versus non-exempt classification that are scheduled to become effective December 1, 2016.
Operating Costs
Operating costs increased $6.8
million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015, primarily due to higher company restaurant revenues. As a percentage of company restaurant revenues, operating costs increased to
22.4% for the twenty-six weeks ended June 26, 2016 from 21.7% in the twenty-six weeks ended June 28, 2015. This increase was primarily attributable to higher occupancy costs.
Restaurant Depreciation and Amortization
Restaurant depreciation and amortization increased $0.8 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended
June 28, 2015, due primarily to the increased number of company-operated restaurants and our new point-of-sale system. As a percentage of company restaurant revenues, depreciation and amortization was 2.5% and 2.4% during the twenty-six weeks
ended June 26, 2016 and June 28, 2015, respectively.
General and Administrative Expenses
General and administrative expenses decreased $3.7 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended
June 28, 2015. The decrease was due primarily to $4.5 million in legal, accounting and other expenses incurred during the twenty-six weeks ended June 28, 2015 directly related to public offering expenses, $0.9 million of lower stock-based
compensation expense primarily as a result of the vesting of certain performance awards during the twenty-six weeks ended June 28, 2015 and $0.5 million of lower meetings and convention expenses primarily due to our bi-annual franchise
convention and unit director leadership conference occurring during the twenty-six weeks ended June 28, 2015, partially offset by headcount added to support an increased number of restaurants in our system, additional costs as a result of
operating as a public company, and $0.1 million of expenses incurred in connection with the transition to a new distributor. As a percentage of total revenues, general and administrative expenses were 7.3% and 9.6% during the twenty-six weeks ended
June 26, 2016 and June 28, 2015, respectively.
32
We expect our recurring general and administrative expenses will continue to increase as we grow our business and
incur additional expenses related to being a newer public company.
Interest Expense
Interest expense decreased $0.4 million during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015. The
decrease was due primarily to principal payments of $33.2 million on our long-term debt and a reduction in our applicable rate, partially offset by an increase in the LIBOR rate and interest expense associated with interest rate swaps.
Income Taxes
Income taxes increased $1.8 million
during the twenty-six weeks ended June 26, 2016 compared to the twenty-six weeks ended June 28, 2015. Our effective income tax rates were 35.6% and 45.3% during the twenty-six weeks ended June 26, 2016 and June 28, 2015,
respectively. The decrease in our effective income tax rate was primarily due to expenses incurred during the twenty-six weeks ended June 28, 2015 related to the IPO for which we did not receive a tax deduction and additional tax credits
recorded in the twenty-six weeks ended June 26, 2016 versus the twenty-six weeks ended June 28, 2015.
Contractual Obligations
During the twenty-six weeks ended June 26, 2016, there were no material changes to the contractual obligations as disclosed in the Annual Report on Form
10-K for the fiscal year ended December 27, 2015, other than those made in the ordinary course of business.
Off-Balance Sheet Arrangements
We have guaranteed through 2018 debt from a previous credit facility which was assumed by a franchisee. We may be required to perform this guarantee
in the event of default or nonperformance by this franchisee. We have determined that default by the franchisee is unlikely due to its timely and consistent payments and have therefore not recorded a liability for the debt assumed by this franchisee
on our condensed consolidated balance sheets. The carrying value of debt covered by this additional guarantee by us was approximately $0.1 million at both June 26, 2016 and December 27, 2015.
Emerging Growth Company
We are an emerging growth
company, as defined in Section 2(a) of the Securities Act of 1933, as modified by the Jumpstart our Business Startups Act of 2012, or the JOBS Act (the JOBS Act). As such, we are eligible to take advantage of certain
exemptions from various reporting requirements 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.
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 of 1933 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.
33
We will remain an emerging growth company until the earliest of (a) December 27, 2020,
(b) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (c) the date that we become a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as
amended (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 (d) the
date on which we have issued more than $1 billion in non-convertible debt securities in the preceding three-year period.
Critical Accounting Policies
and Use of Estimates
Our discussion and analysis of operating results and financial condition are based upon our financial statements. The preparation
of our financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our
estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis.
Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our
reported results of operations and our financial position. Management believes that the critical accounting policies and estimates discussed below involve the most difficult management judgments due to the sensitivity of the methods and assumptions
used. Our significant accounting policies are described in Note 1 to our consolidated financial statements contained elsewhere in this Form 10-Q.
There
have been no material changes to our critical accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 27, 2015.
New Accounting Standards
In May 2014, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09). This update was issued to replace the current revenue
recognition guidance, creating a more comprehensive revenue model. This update was originally to be effective in fiscal periods beginning after December 15, 2016 and early application was not permitted. In July 2015, the FASB affirmed its
proposal to defer the effective date by one year to annual reporting periods beginning after December 15, 2017. The FASB also affirmed its proposal to permit early adoption of the standard, but not before the original effective date of
December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In July 2015, the
FASB issued ASU 2015-11,
Inventory (Topic 330)
(ASU 2015-11). The pronouncement was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable
value. This pronouncement is effective for reporting periods beginning after December 15, 2016. The adoption of ASU 2015-11 is not expected to have a significant impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
(ASU 2016-02). ASU 2016-02 is a comprehensive new standard that amends
various aspects of existing guidance for leases and requires additional disclosures about leasing arrangements. ASU 2016-02 will require companies to recognize lease assets and lease liabilities by lessees for those leases classified as operating
leases under previous GAAP. ASU 2016-02 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification
criteria for distinguishing between capital leases and operating leases in the previous guidance relating to leases. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal
years. Early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
34
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09)
,
which simplifies several aspects of the accounting for employee share-based payment transactions. ASU 2016-09 addresses several aspects of the accounting for share-based payment award transactions, including:
(a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance on our consolidated financial statements.
Liquidity and Capital Resources
Our primary requirements
for liquidity and capital are new company-operated restaurants, existing restaurant capital investments (remodels and maintenance), information technology investments, principal and interest payments on our term debt and capital lease obligations,
operating lease obligations and working capital and general corporate needs. Our customers pay for their purchases in cash or by payment card (credit or debit) at the time of sale. Therefore, we are able to sell many of our inventory items before we
have to pay our suppliers for such items. Our restaurants do not require significant inventories or receivables. We have accounts receivable from our franchisees, which are primarily related to royalty revenues, as well as from certain vendors.
Our growth plan is dependent upon many factors, including economic conditions, real estate markets, restaurant locations and the nature of our lease
agreements. Our capital expenditure outlays are also dependent on costs for maintenance in our existing restaurants as well as information technology and other general corporate expenditures. We primarily utilize build-to-suit developments and
equipment financing leases for our new company-operated restaurants, requiring minimal upfront cash investment. While we currently primarily utilize a build-to-suit development strategy combined with equipment financing leases, our new restaurant
strategy may change over time.
We currently expect that our capital expenditures for 2016 will range between $12.5 million and $13.5 million excluding
approximately $1.7 million to $1.8 million of restaurant preopening costs for restaurants that are not capitalized. These capital estimates are based on restaurant capital expenditures for the opening of 28 to 29 company-operated restaurants as well
as investments to remodel and improve our existing restaurants, investments in technology and expenditures for general corporate purposes.
We believe
that cash and cash equivalents and expected cash flow from operations are adequate to fund debt service requirements, capital lease obligations, operating lease obligations, capital expenditures and working capital needs for at least the next twelve
months. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenues and cash flow from operations, our ability to manage costs and working
capital successfully and the continued availability of build-to-suit and equipment financing leases for our new company-operated restaurants. We have used excess cash flows to make payments on our outstanding long-term debt in advance of the
required due date, and we may continue to do so in future periods.
35
The following table presents summary cash flow information for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
June 26,
2016
|
|
|
June 28,
2015
|
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
25,287
|
|
|
$
|
18,646
|
|
Investing activities
|
|
|
(3,901
|
)
|
|
|
(4,829
|
)
|
Financing activities
|
|
|
(18,225
|
)
|
|
|
(14,255
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
$
|
3,161
|
|
|
$
|
(438
|
)
|
|
|
|
|
|
|
|
|
|
Operating Activities
Net cash provided by operating activities increased from $18.6 million during the twenty-six weeks ended June 28, 2015 to $25.3 million during the
twenty-six weeks ended June 26, 2016. The increase was primarily attributable to an increase in cash generated from our operations due to the net increase in company-operated restaurants, an increase in franchise royalty revenues and an
increase in comparable restaurant sales, as well as the costs associated with our IPO incurred during the twenty-six weeks ended June 28, 2015.
Investing Activities
Net cash used in investing
activities decreased from $4.8 million during the twenty-six weeks ended June 28, 2015 to $3.9 million during the twenty-six weeks ended June 26, 2016. The decrease was primarily attributable to a reduction in purchases of property and
equipment and the purchase of a franchisees assets during the twenty-six weeks ended June 28, 2015.
Financing Activities
Net cash used in financing activities increased from $14.3 million during the twenty-six weeks ended June 28, 2015 to $18.2 million during the twenty-six
weeks ended June 26, 2016. This increase was primarily due to $5.1 million and $0.7 million of higher principal payments on long-term debt and capital lease obligations, respectively, partially offset by a $0.7 million increase in proceeds
received from the exercises of stock options and a $1.2 million increase in the associated excess tax benefit.
Debt and Other Obligations
Credit Agreement
On October 9, 2012, we
entered into a credit agreement (Credit Agreement) with several financial institutions. The Credit Agreement is secured by substantially all of our assets and originally provided for borrowings under a term loan of $175.0 million and a
revolving credit facility of $25.0 million, with a maturity date of October 9, 2017. In May 2013, we amended the Credit Agreement to provide for an additional $50.0 million term loan, the proceeds of which were used to fund a distribution to
the holders of our Series A preferred stock. In April 2014, we further amended the Credit Agreement to provide for an additional $50.0 million term loan, the proceeds of which were also used to fund a distribution to the holders of our Series A
preferred stock, and to extend the maturity date to October 9, 2018. On July 23, 2015, we amended the Credit Agreement in order to permit the merger of BHI Intermediate Holding Corp., our former wholly owned subsidiary, into us. On
September 25, 2015, we further amended the Credit Agreement to, among other things, extend the maturity date on the Credit Agreement to October 9, 2020 and lower the applicable interest rate. We had $182.5 million of outstanding term loans
and no outstanding borrowings under our revolving credit facility as of June 26, 2016.
36
Borrowings under the Credit Agreement are allowed under base rate and Eurodollar rate loans. Base rate loans bear
interest at the higher of (1) the Bank of America prime rate, (2) the Federal Funds Rate plus 0.50%, or (3) the LIBOR rate for one-month loans plus 1.00% and an applicable rate. Eurodollar rate loans may be entered or converted into
one-, two-, three-, or six-month periods and are charged interest at the LIBOR rate on the effective date for the period selected, plus an applicable rate. As of June 26, 2016, all of our outstanding term loan debt was in one-month Eurodollar
loans with an interest rate of approximately 2.70%.
Debt Covenants
Our Credit Agreement contains various covenants that, among other things, do not allow us to exceed a maximum consolidated total lease adjusted leverage ratio,
require us to maintain a minimum consolidated fixed charge coverage ratio, and place certain limitations on cash capital expenditures. We were in compliance with all of the covenants under our Credit Agreement as of June 26, 2016.
Hedging Arrangements
In connection with our
Credit Agreement, as of June 26, 2016, we have three variable-to-fixed interest rate swap agreements to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR. 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 interest fixed at 1.3325% and receive the one-month LIBOR rate.
Also on May 17, 2013, we entered into a separate interest rate swap contract with an effective date of May 31, 2013, a termination date of May 31, 2017 and a notional amount of $25.0 million, under which we pay interest fixed at
0.70125% and receive the one-month LIBOR rate. On October 26, 2015, we entered into another interest rate swap contract with an effective date of October 30, 2015, a termination date of October 31, 2019 and a notional amount of $50.0
million, under which we pay interest fixed at 1.115% and receive the one-month LIBOR rate.