TACO Del Taco Restaurants Inc

System-wide Comparable Restaurant Sales Increased 3.3%Reaffirms Annual Guidance on an Adjusted BasisIncreases Repurchase Program by $25 million to $75 Million

Del Taco Restaurants, Inc. (“Del Taco” or the “Company”), (NASDAQ: TACO), the second largest Mexican-American quick service restaurant chain by units in the United States, today reported fiscal second quarter 2018 financial results. Additionally, the Company reaffirmed guidance for fiscal year 2018 on an adjusted basis and announced a $25 million increase in its repurchase program for common stock and warrants to $75 million.

Fiscal Second Quarter 2018 Highlights

• System-wide comparable restaurant sales grew 3.3%, marking the 19th consecutive quarter of gains;
  • Company-operated comparable restaurant sales grew 2.5%, marking the 24th consecutive quarter of gains. Company-operated comparable restaurant sales growth was comprised of average check growth of 3.7%, including approximately 1% of menu mix growth, offset by a transaction decrease of 1.2%;
  • Franchised comparable restaurant sales grew 4.2%;
• Total revenue increased 8.5% to $117.8 million (including $3.1 million of franchise advertising contributions and $0.2 million of other franchise revenue required as part of the new revenue recognition rules adopted in the first fiscal quarter whereby the offsetting impact is an increase to expenses such that there is no impact on operating income and net income) compared to $108.6 million in the fiscal second quarter 2017;
• Company restaurant sales increased 5.6% to $109.8 million compared to $104.0 million in the fiscal second quarter 2017;
• Net income was $4.2 million, or $0.11 per diluted share, compared to $5.3 million in the fiscal second quarter 2017, or $0.13 per diluted share;
• Adjusted net income* was $5.4 million, or $0.14 per diluted share, compared to $5.3 million in the fiscal second quarter 2017, or $0.13 per diluted share;
• Restaurant contribution* margin was 19.7% compared to 20.3% in the fiscal second quarter 2017; and
• Adjusted EBITDA* was $16.8 million compared to $17.0 million in the fiscal second quarter 2017.

Adjusted net income*, Restaurant contribution*, and Adjusted EBITDA* are non-GAAP measures and defined below under “Key Financial Definitions”. Please see the reconciliation of non-GAAP measures accompanying this release.

John D. Cappasola, Jr., President and Chief Executive Officer of Del Taco, commented, “During the quarter we were proud to achieve our company average unit volume (AUV) goal of $1.5 million on a trailing 12 month basis, that we set following our entrance to the public markets several years ago. Since fiscal 2013 our company and franchise AUV’s have each grown by more than 25%, helping us achieve enhanced unit economics that are driving company and franchise growth opportunities.”

Cappasola continued, “Our second quarter was in line with our expectations and we remain on track to achieve our annual guidance on an adjusted basis. We are particularly pleased with our system-wide comparable restaurant sales growth of 3.3%, or 10.4% on a two-year basis, and our restaurant contribution margin performance, which improved sequentially in the quarter, contracting only 10 basis points after adjusting for the timing of advertising expenses.

Cappasola concluded, “Early in the third quarter we launched Elevated Combined Solutions which includes brand catalysts and operational improvements designed to further our mission to be the category leader in the value oriented QSR+ segment. This latest iteration of our pivotal brand strategy includes a new concept tagline – Fresh Mexican Grill, a new holistic advertising campaign ‘Celebrating the Hardest Working Hands in Fast Food’, reimagined packaging, enhanced hospitality initiatives, newly designed menu boards, new kitchen equipment and updated crew uniforms. Early guest feedback on these enhancements has been positive.”

Review of Fiscal Second Quarter 2018 Financial Results

Total revenue increased 8.5% to $117.8 million (including $3.1 million of franchise advertising contributions and $0.2 million of other franchise revenue required as part of the new revenue recognition rules adopted in the first fiscal quarter whereby the offsetting impact is an increase to expenses such that there is no impact on operating income and net income) compared to $108.6 million in the fiscal second quarter 2017. Excluding these revenue recognition impacts total revenue increased 5.4%.

Comparable restaurant sales increased 3.3% system-wide, resulting in a 10.4% increase on a two-year basis. The Del Taco system has now generated comparable restaurant sales growth for 19 consecutive quarters. Company-operated comparable restaurant sales increased 2.5%, marking 24 consecutive quarters of comparable restaurant sales growth. Franchise comparable restaurant sales increased 4.2%.

Net income was $4.2 million, representing $0.11 per diluted share, compared to $5.3 million in the fiscal second quarter 2017, representing $0.13 per diluted share.

Adjusted net income* was $5.4 million, or $0.14 per diluted share, compared to $5.3 million in the fiscal second quarter 2017, or $0.13 per diluted share. Adjusted net income excludes the impairment of long-lived assets charge totaling approximately $1.7 million, or approximately $1.2 million after the related tax impact, representing $0.04 per diluted share, or $0.03 per diluted share after the related tax impact.

Restaurant contribution* was $21.7 million compared to $21.1 million in the fiscal second quarter 2017. As a percentage of Company restaurant sales, restaurant contribution margin decreased approximately 60 basis points year-over-year to 19.7%. The decrease was the result of an approximate 40 basis point increase in labor and related expenses and an approximate 50 basis point increase in occupancy and other operating expenses, which was all related to the timing of advertising expenses. These increases were partially offset by a 30 basis point decrease in food and paper costs.

Adjusted EBITDA* was $16.8 million compared to $17.0 million in the fiscal second quarter 2017.

Restaurant Portfolio

During the fiscal second quarter 2018, we opened one company-operated restaurant and one franchised restaurant, and closed one company-operated restaurant and one franchised restaurant.

Thus far in the fiscal third quarter 2018, our franchise partners have opened one restaurant and there are currently 16 restaurants (eight franchised and eight company) under construction, all of which are expected to open this fiscal year. The remaining restaurants expected to open in fiscal year 2018 are expected to commence construction within the next two months.

Repurchase Program for Common Stock and Warrants

On July 23, 2018, the Board of Directors increased the repurchase program for Del Taco’s common stock and warrants to $75 million (raised from $50 million). The increased authorization will expire upon completion of the repurchase program unless terminated earlier by the Board of Directors.

During the fiscal second quarter 2018, we repurchased 407,821 shares of common stock at average price of $11.57 per share for a total of $4.7 million, and repurchased 11,132 warrants at an average price per warrant of $2.68.

There are currently 38,299,842 common shares and 5,978,991 warrants outstanding and approximately $41.2 million remains under the $75 million authorization.

Fiscal Year 2018 Guidance

We are reiterating the following guidance for fiscal year 2018, the 52-week period ending January 1, 2019:

• System-wide same store sales growth of approximately 2% to 4%;
• Total revenue between $506 million and $516 million, reflecting the new revenue recognition rules whereby franchise advertising contributions and other franchise revenue, which totaled $12.7 million and $0.8 million in fiscal year 2017, respectively, will now be reported on a gross basis. This guidance also includes an estimated $0.5 million unfavorable impact from the timing of initial franchise fees and renewal fees which must be deferred and recognized over the term of the related franchise agreement;
• Total company-operated restaurant sales between $473 million and $483 million;
• Restaurant contribution margin between 19.3% and 19.8%;
• General and administrative expenses between approximately 8.2% and 8.5% of total revenue, including the expense side of the other franchise revenue that will now be reported on a gross basis;
• Effective tax rate of approximately 26.5% to 27.5%;
• Adjusted diluted earnings per share of approximately $0.59 to $0.63;
• Adjusted EBITDA between $71.5 million and $74.0 million;
• 25 to 28 new system-wide restaurant openings; and
• Net capital expenditures between $35.0 million to $38.0 million.

We have not reconciled guidance for Adjusted diluted earnings per share and Adjusted EBITDA to the corresponding GAAP financial measure because we do not provide guidance for the various reconciling items. We are unable to provide guidance for these reconciling items because we cannot determine their probable significance, as certain items are outside of our control and cannot be reasonably predicted since these items could vary significantly from period to period. Accordingly, a reconciliation to the corresponding GAAP financial measure is not available without unreasonable effort.

Conference Call

A conference call and webcast to discuss Del Taco’s financial results and annual guidance is scheduled for 5:00 p.m. ET today. Hosting the conference call and webcast will be John D. Cappasola, Jr., President and Chief Executive Officer; and Steven L. Brake, Executive Vice President and Chief Financial Officer.

Interested parties may listen to the conference call via telephone by dialing 631-891-4304. A telephone replay will be available shortly after the call has concluded and can be accessed by dialing 412-317-6671, the passcode is 10005217.

The webcast will be available at www.deltaco.com under the investors section and will be archived on the site shortly after the call has concluded.

Key Financial Definitions

Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable company, franchise and total system restaurant base. Restaurants are included in the comparable store base in the accounting period following its 18th full month of operations and excludes restaurant closures.

Restaurant contribution* is defined as company restaurant sales less restaurant operating expenses, which are food and paper costs, labor and related expenses and occupancy and other operating expenses. Restaurant contribution margin is defined as restaurant contribution as a percentage of company restaurant sales. Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of restaurants and the calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of results as reported under U.S. GAAP. Management believes that restaurant contribution and restaurant contribution margin are important tools for investors because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. Management uses restaurant contribution and restaurant contribution margin as key performance indicators to evaluate the profitability of incremental sales at Del Taco restaurants, to evaluate restaurant performance across periods and to evaluate restaurant financial performance compared with competitors.

Adjusted EBITDA* is defined as net income/loss prior to interest expense, income taxes, and depreciation and amortization, as adjusted to add back certain charges, such as stock-based compensation expense and transaction-related costs, as these expenses are not considered an indicator of ongoing company performance. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to operating income or net income/loss as a measure of operating performance or cash flows or as measures of liquidity. Non-GAAP financial measures are not necessarily calculated the same way by different companies and should not be considered a substitute for or superior to GAAP results. We believe Adjusted EBITDA facilitates operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or 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 Adjusted EBITDA because (i) we believe this measure is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry and (ii) we use Adjusted EBITDA internally as a benchmark to compare performance to that of competitors.

Adjusted net income* represents company net income before impairment of long-lived assets, net of tax. Adjusted diluted net income per share represents company diluted net income per share before impairment of long-lived assets, net of tax.

About Del Taco Restaurants, Inc.

Del Taco (NASDAQ: TACO) offers a unique variety of both Mexican and American favorites such as burritos and fries, prepared fresh in every restaurant's working kitchen with the value and convenience of a drive-thru. Del Taco's menu items taste better because they are made with quality ingredients like fresh grilled chicken and carne asada steak, hand-sliced avocado, hand-grated cheddar cheese, slow-cooked beans made from scratch, and creamy Queso Blanco. Del Taco’s new advertising campaign, “Celebrating the Hardest Working Hands in Fast Food,” further communicates the company’s commitment to providing guests with fresh, quality food prepared by hand every day. Founded in 1964, today Del Taco serves more than three million guests each week at its more than 560 restaurants across 14 states. For more information, visit www.deltaco.com.

Forward-Looking Statements

In addition to historical information, this release may contain a number of “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, information concerning Del Taco’s possible or assumed future results of operations, business strategies, competitive position, industry environment, potential growth opportunities and the effects of regulation. These statements are based on Del Taco’s management’s current expectations and beliefs, as well as a number of assumptions concerning future events. When used in this press release, the words “estimates,” “projected,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes,” “seeks,” “target,” “may,” “will,” “should,” “future,” “propose,” “preliminary,” “guidance,” “on track” and variations of these words or similar expressions (or the negative versions of such words or expressions) are intended to identify forward-looking statements. Such forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside Del Taco’s management’s control that could cause actual results to differ materially from the results discussed in the forward-looking statements. These risks included, without limitation, consumer demand, our inability to successfully open company-operated or franchised restaurants or establish new markets, competition in our markets, our inability to grow and manage growth profitably, adverse changes in food and supply costs, our inability to access additional capital, changes in applicable laws or regulations, food safety and foodborne illness concerns, our inability to manage existing and to obtain additional franchisees, our inability to attract and retain qualified personnel, our inability to profitably expand into new markets, changes in, or the discontinuation of, the Company’s repurchase program, and the possibility that we may be adversely affected by other economic, business, and/or competitive factors. Additional risks and uncertainties are identified and discussed in Del Taco’s reports filed with the SEC, including under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended January 2, 2018, and available at the SEC’s website at www.sec.gov and the Company’s website at www.deltaco.com.

Forward-looking statements included in this release speak only as of the date of this release. Del Taco undertakes no obligation to update its forward-looking statements to reflect events or circumstances after the date of this release or otherwise.

Del Taco Restaurants, Inc. Consolidated Balance Sheets (In thousands, except share and per share data)     June 19, 2018 January 2, 2018 Assets (unaudited) Current assets: Cash and cash equivalents $ 13,146 $ 6,559 Accounts and other receivables, net 3,269 3,828 Inventories 2,710 2,712 Prepaid expenses and other current assets   2,667   6,784 Total current assets 21,792 19,883 Property and equipment, net 161,883 156,124 Goodwill 320,638 320,638 Trademarks 220,300 220,300 Intangible assets, net 20,006 21,498 Other assets, net   4,498   3,881 Total assets $ 749,117 $ 742,324   Liabilities and shareholders' equity Current liabilities: Accounts payable $ 17,608 $ 18,759 Other accrued liabilities 37,319 35,257

Current portion of capital lease obligations and deemed landlordfinancing liabilities

 

  1,194   1,415 Total current liabilities 56,121 55,431 Long-term debt, capital lease obligations and deemed landlord financing

liabilities, excluding current portion, net

170,324 170,639 Deferred income taxes 68,896 68,574 Other non-current liabilities   32,604   31,431 Total liabilities 327,945 326,075   Shareholders' equity:

Preferred stock, $0.0001 par value; 1,000,000 shares authorized; no sharesissued and outstanding

 

— —

Common stock, $0.0001 par value; 400,000,000 shares authorized;38,091,165 shares issued and outstanding at June 19, 2018; 38,434,274shares issued and outstanding at January 2, 2018

 

4 4 Additional paid-in capital 347,220 349,334 Accumulated other comprehensive income 319 14 Retained earnings   73,629   66,897 Total shareholders' equity   421,172   416,249 Total liabilities and shareholders' equity $ 749,117 $ 742,324 Del Taco Restaurants, Inc. Consolidated Statements of Comprehensive Income (Unaudited) (In thousands, except share and per share data)         12 Weeks Ended 24 Weeks Ended June 19, 2018 June 20, 2017 June 19, 2018 June 20, 2017 Revenue: Company restaurant sales $ 109,800 $ 104,022 $ 214,909 $ 205,244 Franchise revenue 4,149 3,903 7,941 7,516 Franchise advertising contributions 3,136 — 6,072 — Franchise sublease income   728     656     1,445     1,166   Total revenue 117,813 108,581 230,367 213,926 Operating expenses: Restaurant operating expenses: Food and paper costs 30,082 28,770 59,055 56,688 Labor and related expenses 35,422 33,185 70,240 66,406 Occupancy and other operating expenses 22,627 20,918 44,613 41,636 General and administrative 10,321 9,055 20,750 18,360 Franchise advertising expenses 3,136 — 6,072 — Depreciation and amortization 5,847 5,278 11,761 10,381 Occupancy and other - franchise subleases 651 602 1,289 1,083 Pre-opening costs 199 151 641 177 Impairment of long-lived assets 1,661 — 1,661 — Restaurant closure charges, net (24 ) 6 (37 ) 15 Loss on disposal of assets, net   87     340     180     291   Total operating expenses   110,009     98,305     216,225     195,037   Income from operations 7,804 10,276 14,142 18,889 Other expense Interest expense   2,012     1,627     3,922     3,170   Total other expense   2,012     1,627     3,922     3,170   Income from operations before provision for income taxes 5,792 8,649 10,220 15,719 Provision for income taxes   1,582     3,319     2,781     6,151   Net income 4,210 5,330 7,439 9,568 Other comprehensive income (loss): Change in fair value of interest rate cap, net of tax 115 (148 ) 289 (236 ) Reclassification of interest rate cap amortization included in

net income

  10     —     16     —   Total other comprehensive income (loss)   125     (148 )   305     (236 ) Comprehensive income $ 4,335   $ 5,182   $ 7,744   $ 9,332   Earnings per share: Basic $ 0.11 $ 0.14 $ 0.19 $ 0.25 Diluted $ 0.11 $ 0.13 $ 0.19 $ 0.24 Weighted-average shares outstanding Basic 38,299,483 38,535,855 38,370,595 38,769,895 Diluted 38,643,873 39,808,485 38,938,106 40,094,476 Del Taco Restaurants, Inc. Reconciliation of Net Income to EBITDA and Adjusted EBITDA (Unaudited) (In thousands)         12 Weeks Ended 24 Weeks Ended June 19, 2018 June 20, 2017 June 19, 2018 June 20, 2017 Net income $ 4,210 $ 5,330 $ 7,439 $ 9,568 Non-GAAP adjustments: Provision for income taxes 1,582 3,319 2,781 6,151 Interest expense 2,012 1,627 3,922 3,170 Depreciation and amortization   5,847     5,278     11,761     10,381   EBITDA   13,651     15,554     25,903     29,270   Stock-based compensation expense (a) 1,360 1,080 2,634 2,149 Loss on disposal of assets, net (b) 87 340 180 291 Restaurant closure charges, net (c) (24 ) 6 (37 ) 15 Amortization of favorable and unfavorable lease assets and liabilities, net (d) (132 ) (145 ) (250 ) (292 ) Pre-opening costs (e) 199 151 641 177 Impairment of long-lived assets (f)   1,661     —     1,661     —   Adjusted EBITDA $ 16,802   $ 16,986   $ 30,732   $ 31,610  

(a)

 

Includes non-cash, stock-based compensation.

(b)

Loss on disposal of assets, net includes the loss or gain on disposal of assets related to sales, retirements and replacement or write-off of leasehold improvements or equipment in the ordinary course of business, net of amortization of deferred gains on asset sales associated with sale-leaseback transactions and gains or losses recorded associated with the sale of company-operated stores to franchisees.

(c)

Includes sublease income from leases which are treated as deemed landlord financing, partially offset by costs related to future obligations associated with the closure or net sublease shortfall of a restaurant.

(d)

Includes amortization of favorable lease assets and unfavorable lease liabilities.

(e)

Pre-opening costs consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including restaurant labor, supplies, cash and non-cash rent expense and other related pre-opening costs. These are generally incurred over the three to five months prior to opening.

(f)

Includes costs related to impairment of long-lived assets.

Del Taco Restaurants, Inc. Reconciliation of Company Restaurant Sales to Restaurant Contribution (Unaudited) (In thousands)         12 Weeks Ended 24 Weeks Ended June 19, 2018 June 20, 2017 June 19, 2018 June 20, 2017 Company restaurant sales $ 109,800 $ 104,022 $ 214,909 $ 205,244 Restaurant operating expenses   88,131   82,873   173,908   164,730 Restaurant contribution $ 21,669 $ 21,149 $ 41,001 $ 40,514 Restaurant contribution margin   19.7 %   20.3 %   19.1 %   19.7 % Del Taco Restaurants, Inc. Reconciliation of Net Income and Diluted Earnings Per Share to Adjusted Net Income and Adjusted Diluted Earnings Per Share (Unaudited) (In thousands, except per share data)           12 Weeks Ended 12 Weeks Ended June 19, 2018 June 20, 2017 $ Per Share $ Per Share Net income and diluted earnings per share, as reported $ 4,210 $ 0.11 $ 5,330 $ 0.13 Impairment of long-lived assets (a) 1,661 0.04 — — Tax impact of adjustment (b)   (449 )   (0.01 )   —   — Non-GAAP adjusted net income and adjusted diluted earnings per share $ 5,422   $ 0.14   $ 5,330 $ 0.13     24 Weeks Ended 24 Weeks Ended June 19, 2018 June 20, 2017 $ Per Share $ Per Share Net income and diluted earnings per share, as reported $ 7,439 $ 0.19 $ 9,568 $ 0.24 Impairment of long-lived assets (a) 1,661 0.04 — — Tax impact of adjustment (b)   (449 )   (0.01 )   —   — Non-GAAP adjusted net income and adjusted diluted earnings per share $ 8,651   $ 0.22   $ 9,568 $ 0.24

(a)

 

Includes costs related to impairment of long-lived assets.

(b)

Represents the income tax associated with the impairment adjustment.

Del Taco Restaurants, Inc. Restaurant Development         12 Weeks Ended 24 Weeks Ended June 19, 2018 June 20, 2017 June 19, 2018 June 20, 2017 Company-operated restaurant activity: Beginning of period 315 305 312 310 Openings 1 1 4 1 Closures (1 ) (2 ) (1 ) (2 ) Sold to franchisees —   —   —   (5 ) Restaurants at end of period 315   304   315   304   Franchise-operated restaurant activity: Beginning of period 251 249 252 241 Openings 1 2 1 5 Closures (1 ) — (2 ) — Purchased from Company —   —   —   5   Restaurants at end of period 251   251   251   251   Total restaurant activity: Beginning of period 566 554 564 551 Openings 2 3 5 6 Closures (2 ) (2 ) (3 ) (2 ) Restaurants at end of period 566   555   566   555  

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For Del Taco Restaurants, Inc.Media:Julia Young, 646-277-1280julia.young@icrinc.comorInvestor Relations:Raphael Gross, 203-682-8253investor@deltaco.com