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 September 24, 2017, have expanded our system-wide restaurants to 749 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 $319.5 million and $939.3 million of system-wide sales during the thirteen and thirty-nine weeks ended September 24, 2017,
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.
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. Refranchised restaurants are
excluded from our AUV calculation for the twelve-month period following the date of the refranchising. This methodology is similar for each trailing twelve-month period outside the fiscal year end.
|
|
|
|
|
|
|
|
|
|
|
Trailing Twelve Months Ended
|
|
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
Average Unit Volumes
|
|
|
|
|
|
|
|
|
Total system-wide
|
|
$
|
1,773
|
|
|
|
1,825
|
|
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. Refranchised restaurants are excluded from our comparable restaurant base for the twelve-month period following
the date of the refranchising. If a company-operated restaurant is temporarily closed for a full calendar week due to items such as a remodel, scrape and rebuild, casualty event, severe weather conditions or any other short-term closure, it is
removed from the comparable restaurant sales calculations for such period it is temporarily closed. If a franchised restaurant is temporarily closed for a full calendar week due to items such as a remodel, scrape and rebuild, casualty event, severe
weather conditions or any other short-term closure, it is removed from the comparable restaurant sales calculations for the entire month(s) impacted by the temporary closure. 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
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
Comparable Restaurant Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-operated
|
|
|
(3.3
|
)%
|
|
|
(0.2
|
)%
|
|
|
(3.4
|
)%
|
|
|
1.1
|
%
|
Franchised
|
|
|
(1.5
|
)%
|
|
|
1.4
|
%
|
|
|
(0.7
|
)%
|
|
|
0.9
|
%
|
Total system-wide
|
|
|
(2.2
|
)%
|
|
|
0.8
|
%
|
|
|
(1.8
|
)%
|
|
|
1.0
|
%
|
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
restaurants typically have lower annual sales volumes than our established company-operated restaurants. 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 and may cannibalize sales of 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 thirty-nine weeks ended September 24, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
September 24, 2017
|
|
|
September 24, 2017
|
|
|
|
Franchised
|
|
|
Company-
Operated
|
|
|
System-
Wide
|
|
|
Franchised
|
|
|
Company-
Operated
|
|
|
System-
Wide
|
|
Restaurants at the beginning of the period
|
|
|
426
|
|
|
|
314
|
|
|
|
740
|
|
|
|
407
|
|
|
|
309
|
|
|
|
716
|
|
Opened during the period
|
|
|
6
|
|
|
|
4
|
|
|
|
10
|
|
|
|
20
|
|
|
|
17
|
|
|
|
37
|
|
Closed during the period
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Refranchised during the period
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants at the end of the period
|
|
|
433
|
|
|
|
316
|
|
|
|
749
|
|
|
|
433
|
|
|
|
316
|
|
|
|
749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurants closed during the period reflects permanent
closures and excludes any temporary closures for items such as remodels, scrape and rebuilds, casualty events, severe weather conditions or any other short-term closure. A relocation results in a closure and an opening. During the thirteen and
thirty-nine weeks ended September 24, 2017, we closed one and four company-operated restaurants, respectively, of which one and three, respectively, were relocations.
|
|
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 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 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
|
|
|
Thirty-Nine Weeks Ended
|
|
(Dollar amounts in thousands)
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
Net income
|
|
$
|
6,957
|
|
|
|
10,019
|
|
|
$
|
23,190
|
|
|
|
27,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain professional, transaction and other costs
(a)
|
|
|
|
|
|
|
24
|
|
|
|
3
|
|
|
|
66
|
|
Payroll taxes associated with stock option
exercises
(b)
|
|
|
24
|
|
|
|
8
|
|
|
|
122
|
|
|
|
79
|
|
Distributor transition costs
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
Executive separation expenses
(d)
|
|
|
|
|
|
|
197
|
|
|
|
551
|
|
|
|
197
|
|
State income tax rate change
(e)
|
|
|
(367
|
)
|
|
|
(908
|
)
|
|
|
(367
|
)
|
|
|
(908
|
)
|
Tax impact of adjustments
(f)
|
|
|
(9
|
)
|
|
|
(82
|
)
|
|
|
(253
|
)
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(352
|
)
|
|
|
(761
|
)
|
|
|
56
|
|
|
|
(641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income
|
|
$
|
6,605
|
|
|
|
9,258
|
|
|
$
|
23,246
|
|
|
|
27,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
Diluted net income per share
|
|
$
|
0.18
|
|
|
|
0.27
|
|
|
$
|
0.60
|
|
|
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain professional, transaction and other costs
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll taxes associated with stock option
exercises
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributor transition costs
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive separation expenses
(d)
|
|
|
|
|
|
|
|
|
|
|
0.02
|
|
|
|
0.01
|
|
State income tax rate change
(e)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
Tax impact of adjustments
(f)
|
|
|
|
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(0.01
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Diluted Net Income per Share
|
|
$
|
0.17
|
|
|
|
0.25
|
|
|
$
|
0.60
|
|
|
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
Represents payroll taxes associated with stock option exercises related to stock options that were outstanding prior to our initial public offering (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.
|
(c)
|
Includes expenses incurred in connection with the transition to our new distributor.
|
(d)
|
Represents severance and legal fees associated with former executives departing the Company.
|
(e)
|
As a result of the enacted reductions to the North Carolina corporate income tax rate during both of the thirteen weeks ended September 24, 2017 and September 25, 2016, we adjusted our deferred income taxes by
applying the lower rate, which resulted in a corresponding decrease to income tax expense
.
|
(f)
|
Represents the income tax expense 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
|
|
|
Thirty-Nine Weeks Ended
|
|
(Dollar amounts in thousands)
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
Net income
|
|
$
|
6,957
|
|
|
|
10,019
|
|
|
$
|
23,190
|
|
|
|
27,894
|
|
Income taxes
|
|
|
2,160
|
|
|
|
4,113
|
|
|
|
9,114
|
|
|
|
13,987
|
|
Interest expense, net
|
|
|
1,493
|
|
|
|
1,819
|
|
|
|
4,761
|
|
|
|
5,778
|
|
Depreciation and amortization
(a)
|
|
|
4,395
|
|
|
|
4,169
|
|
|
|
12,747
|
|
|
|
12,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
15,005
|
|
|
|
20,120
|
|
|
|
49,812
|
|
|
|
59,836
|
|
Non-cash
rent
(b)
|
|
|
321
|
|
|
|
414
|
|
|
|
1,090
|
|
|
|
1,185
|
|
Stock-based compensation
(c)
|
|
|
505
|
|
|
|
404
|
|
|
|
1,185
|
|
|
|
953
|
|
Payroll taxes associated with stock option exercises
(d)
|
|
|
24
|
|
|
|
8
|
|
|
|
122
|
|
|
|
79
|
|
Preopening expenses
(e)
|
|
|
302
|
|
|
|
346
|
|
|
|
1,026
|
|
|
|
942
|
|
Certain professional, transaction and other costs
(f)
|
|
|
|
|
|
|
24
|
|
|
|
3
|
|
|
|
66
|
|
Distributor transition costs
(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
Executive separation expenses
(h)
|
|
|
|
|
|
|
197
|
|
|
|
551
|
|
|
|
197
|
|
Impairment and dispositions
(i)
|
|
|
99
|
|
|
|
730
|
|
|
|
1,033
|
|
|
|
979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
16,256
|
|
|
|
22,243
|
|
|
$
|
54,822
|
|
|
|
64,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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.
|
(g)
|
Includes expenses incurred in connection with the transition to our new distributor.
|
(h)
|
Represents severance and legal fees associated with former executives departing the Company.
|
(i)
|
Includes (gain) loss on disposal of property and equipment and other, 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 may incur future (gains) losses and 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. 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, 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 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
|
|
|
Thirty-Nine Weeks Ended
|
|
(Dollar amounts in thousands)
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
Company restaurant revenues
|
|
$
|
126,207
|
|
|
|
126,358
|
|
|
$
|
378,048
|
|
|
|
372,446
|
|
Food and supplies costs
|
|
|
(40,525
|
)
|
|
|
(39,331
|
)
|
|
|
(119,208
|
)
|
|
|
(116,872
|
)
|
Restaurant labor costs
|
|
|
(37,081
|
)
|
|
|
(35,115
|
)
|
|
|
(110,365
|
)
|
|
|
(102,976
|
)
|
Operating costs
|
|
|
(31,009
|
)
|
|
|
(28,625
|
)
|
|
|
(90,441
|
)
|
|
|
(83,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant contribution
|
|
$
|
17,592
|
|
|
|
23,287
|
|
|
$
|
58,034
|
|
|
|
68,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant contribution margin
|
|
|
13.9
|
%
|
|
|
18.4
|
%
|
|
|
15.4
|
%
|
|
|
18.5
|
%
|
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.
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
25
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.
Although the implementation of the Department
of Labor (DOL) regulations related to overtime and exempt versus
non-exempt
classification that were scheduled to become effective December 1, 2016 were enjoined and ultimately found invalid,
we increased the salaries of certain of our team members during the fourth fiscal quarter of fiscal 2016 in response to these regulations. Increasing the salary of these employees and overall labor inflation, along with various labor initiatives we
intend to implement, including service enhancements and employing more full-time versus part-time team members, and higher health care costs will increase our restaurant labor costs. The DOL continues to consider regulations related to overtime and
exempt versus
non-exempt
classification, and our restaurant labor costs could increase further if new regulations are adopted and implemented.
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 as restaurant remodels, 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 our recurring general and administrative expenses will increase as we grow our business and incur additional expenses related to being a newer 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
as 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 the 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.
26
Loss (Gain) on Disposal of Property and Equipment and Other
Loss (gain) on disposal of property and equipment and other 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.
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 September 24, 2017 Compared with the Thirteen Weeks Ended September 25, 2016
Our operating results for the thirteen weeks ended September 24, 2017 and September 25, 2016 are compared below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
|
Increase/
(Decrease)
|
|
|
Percentage
Change
|
|
|
|
(Dollar amounts in thousands)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$
|
126,207
|
|
|
$
|
126,358
|
|
|
$
|
(151
|
)
|
|
|
(0.1
|
)%
|
Franchise royalty revenues
|
|
|
7,018
|
|
|
|
6,739
|
|
|
|
279
|
|
|
|
4.1
|
%
|
Other franchise revenues
|
|
|
200
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
133,425
|
|
|
|
133,197
|
|
|
|
228
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant operating expenses:
|
|
|
|
|
|
|
|
|
Food and supplies costs
|
|
|
40,525
|
|
|
|
39,331
|
|
|
|
1,194
|
|
|
|
3.0
|
%
|
Restaurant labor costs
|
|
|
37,081
|
|
|
|
35,115
|
|
|
|
1,966
|
|
|
|
5.6
|
%
|
Operating costs
|
|
|
31,009
|
|
|
|
28,625
|
|
|
|
2,384
|
|
|
|
8.3
|
%
|
Depreciation and amortization
|
|
|
3,501
|
|
|
|
3,225
|
|
|
|
276
|
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant operating expenses
|
|
|
112,116
|
|
|
|
106,296
|
|
|
|
5,820
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income before other operating expenses
|
|
|
21,309
|
|
|
|
26,901
|
|
|
|
(5,592
|
)
|
|
|
(20.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
9,814
|
|
|
|
9,276
|
|
|
|
538
|
|
|
|
5.8
|
%
|
Depreciation and amortization
|
|
|
747
|
|
|
|
745
|
|
|
|
2
|
|
|
|
0.3
|
%
|
Impairment
|
|
|
126
|
|
|
|
592
|
|
|
|
(466
|
)
|
|
|
(78.7
|
)%
|
(Gain) loss on disposal of property and equipment and other
|
|
|
(135
|
)
|
|
|
138
|
|
|
|
(273
|
)
|
|
|
(197.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
10,552
|
|
|
|
10,751
|
|
|
|
(199
|
)
|
|
|
(1.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
10,757
|
|
|
|
16,150
|
|
|
|
(5,393
|
)
|
|
|
(33.4
|
)%
|
Amortization of deferred debt issuance costs
|
|
|
(147
|
)
|
|
|
(199
|
)
|
|
|
52
|
|
|
|
(26.1
|
)%
|
Interest income
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
n/m
|
|
Interest expense
|
|
|
(1,495
|
)
|
|
|
(1,819
|
)
|
|
|
324
|
|
|
|
(17.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
9,117
|
|
|
|
14,132
|
|
|
|
(5,015
|
)
|
|
|
(35.5
|
)%
|
Income taxes
|
|
|
2,160
|
|
|
|
4,113
|
|
|
|
(1,953
|
)
|
|
|
(47.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,957
|
|
|
$
|
10,019
|
|
|
$
|
(3,062
|
)
|
|
|
(30.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/m = not meaningful
Company Restaurant Revenues
Company restaurant
revenues decreased $0.2 million, or 0.1%, during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016. The decline in company restaurant revenues was primarily due to decrease in
comparable company restaurant sales of $3.9 million, or 3.3%, due to a decrease in transactions and mix, partially offset by increases in price at our comparable restaurants. The decrease in comparable company restaurant sales was partially
offset by an increase in the
non-comparable
restaurant base (net additions of 15 company-operated restaurants at September 24, 2017 compared to September 25, 2016) accounting for $3.7 million.
28
Franchise Royalty Revenues
Franchise royalty revenues increased $0.3 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended
September 25, 2016. The increase was primarily due to a net additional 35 franchised restaurants at September 24, 2017 compared to September 25, 2016, partially offset by a decrease in franchised comparable restaurant sales of 1.5%.
Other Franchise Revenues
Other franchise
revenues increased $0.1 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016. The increase was primarily due to the timing of the opening of franchised restaurants.
Food and Supplies Costs
Food and supplies costs
increased $1.2 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016. This increase was primarily driven by higher commodity costs. Food and supplies costs as a percentage
of company restaurant revenues during the thirteen weeks ended September 24, 2017 was 32.1% versus 31.1% during the thirteen weeks ended September 25, 2016. This increase was primarily due to commodity inflation and menu mix changes,
partially offset by our menu price increases.
Restaurant Labor Costs
Company-operated restaurant labor costs increased $2.0 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks
ended September 25, 2016, primarily due to an increase in the number of company-operated restaurants and wage inflation. As a percentage of company restaurant revenues, restaurant labor costs increased to 29.4% during the thirteen weeks ended
September 24, 2017 from 27.8% during the thirteen weeks ended September 25, 2016. This increase was primarily driven by an increase in direct labor, partially offset by lower incentive compensation.
We expect that our restaurant labor costs will continue to increase due to the tightening labor market and higher medical costs, as well as certain labor
initiatives across company-operated restaurants, including service enhancements and 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 increasing the
salaries of certain of our team members in November 2016 and overall labor inflation. The foregoing November 2016 salary increase was in response to proposed DOL regulations related to overtime and exempt versus
non-exempt
classification that were ultimately invalidated. We may incur increased labor costs if the DOL were to propose new regulations and those regulations are adopted and implemented.
Operating Costs
Operating costs increased
$2.4 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016, primarily due to an increase in the number of company-operated restaurants. As a percentage of company restaurant
revenues, operating costs increased to 24.6% during the thirteen weeks ended September 24, 2017 from 22.7% during the thirteen weeks ended September 25, 2016. The increase was primarily due to higher occupancy and utilities costs, as well
as our uniform refresh program.
Restaurant Depreciation and Amortization
Restaurant depreciation and amortization increased $0.3 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks
ended September 25, 2016, due primarily to the increased number of company-operated restaurants. As a percentage of company restaurant revenues, depreciation and amortization was 2.8% and 2.6% during the thirteen weeks ended September 24,
2017 and September 25, 2016, respectively.
29
General and Administrative Expenses
General and administrative expenses increased $0.5 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended
September 25, 2016. The increase during the thirteen weeks ended September 24, 2017 was due primarily to $0.2 million of higher expense recorded in connection with the identification and due diligence of potential new locations for
company-operated restaurants that we ultimately decided not to pursue, $0.2 million of higher employee relocation expenses and headcount added to support an increased number of restaurants in our system, partially offset by lower incentive
compensation. As a percentage of total revenues, general and administrative expenses were 7.4% and 7.0% during the thirteen weeks ended September 24, 2017 and September 25, 2016, respectively.
We expect our recurring general and administrative expenses will increase as we grow our business and incur additional expenses related to being a newer
public company.
Interest Expense
Interest
expense decreased $0.3 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016. The decrease was due primarily to principal payments of $35.4 million on our long-term
debt from September 26, 2016 to September 24, 2017, a reduction in our applicable rate and lower interest expense associated with interest rate swaps, partially offset by an increase in the LIBOR rate.
Income Taxes
Income taxes decreased
$2.0 million during the thirteen weeks ended September 24, 2017 compared to the thirteen weeks ended September 25, 2016. Our effective income tax rates were 23.7% and 29.1% during the thirteen weeks ended September 24, 2017 and
September 25, 2016, respectively. The effective income tax rates for the thirteen weeks ended September 24, 2017 and September 25, 2016 reflect a deferred income tax benefit due to a reduction in the North Carolina corporate income
tax rate and the recognition of certain tax credits. In addition, the income tax rate for the thirteen weeks ended September 24, 2017 reflects the recognition of $0.4 million of excess tax benefits associated with the exercise of stock
options.
30
Thirty-Nine Weeks Ended September 24, 2017 Compared with the Thirty-Nine Weeks Ended
September 25, 2016
Our operating results for the thirty-nine weeks ended September 24, 2017 and September 25, 2016 are compared
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
|
Increase/
(Decrease)
|
|
|
Percentage
Change
|
|
|
|
(Dollar amounts in thousands)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Company restaurant revenues
|
|
$
|
378,048
|
|
|
$
|
372,446
|
|
|
$
|
5,602
|
|
|
|
1.5
|
%
|
Franchise royalty revenues
|
|
|
20,509
|
|
|
|
19,532
|
|
|
|
977
|
|
|
|
5.0
|
%
|
Other franchise revenues
|
|
|
738
|
|
|
|
470
|
|
|
|
268
|
|
|
|
57.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
399,295
|
|
|
|
392,448
|
|
|
|
6,847
|
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant operating expenses:
|
|
|
|
|
|
|
|
|
Food and supplies costs
|
|
|
119,208
|
|
|
|
116,872
|
|
|
|
2,336
|
|
|
|
2.0
|
%
|
Restaurant labor costs
|
|
|
110,365
|
|
|
|
102,976
|
|
|
|
7,389
|
|
|
|
7.2
|
%
|
Operating costs
|
|
|
90,441
|
|
|
|
83,645
|
|
|
|
6,796
|
|
|
|
8.1
|
%
|
Depreciation and amortization
|
|
|
10,082
|
|
|
|
9,432
|
|
|
|
650
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company restaurant operating expenses
|
|
|
330,096
|
|
|
|
312,925
|
|
|
|
17,171
|
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income before other operating expenses
|
|
|
69,199
|
|
|
|
79,523
|
|
|
|
(10,324
|
)
|
|
|
(13.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
28,584
|
|
|
|
28,189
|
|
|
|
395
|
|
|
|
1.4
|
%
|
Depreciation and amortization
|
|
|
2,225
|
|
|
|
2,178
|
|
|
|
47
|
|
|
|
2.2
|
%
|
Impairment
|
|
|
1,123
|
|
|
|
981
|
|
|
|
142
|
|
|
|
14.5
|
%
|
Gain on disposal of property and equipment and other
|
|
|
(238
|
)
|
|
|
(51
|
)
|
|
|
(187
|
)
|
|
|
366.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
31,694
|
|
|
|
31,297
|
|
|
|
397
|
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
37,505
|
|
|
|
48,226
|
|
|
|
(10,721
|
)
|
|
|
(22.2
|
)%
|
Amortization of deferred debt issuance costs
|
|
|
(440
|
)
|
|
|
(567
|
)
|
|
|
127
|
|
|
|
(22.4
|
)%
|
Interest income
|
|
|
15
|
|
|
|
4
|
|
|
|
11
|
|
|
|
n/m
|
|
Interest expense
|
|
|
(4,776
|
)
|
|
|
(5,782
|
)
|
|
|
1,006
|
|
|
|
(17.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
32,304
|
|
|
|
41,881
|
|
|
|
(9,577
|
)
|
|
|
(22.9
|
)%
|
Income taxes
|
|
|
9,114
|
|
|
|
13,987
|
|
|
|
(4,873
|
)
|
|
|
(34.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23,190
|
|
|
$
|
27,894
|
|
|
$
|
(4,704
|
)
|
|
|
(16.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/m = not meaningful
Company Restaurant Revenues
Company restaurant
revenues increased $5.6 million, or 1.5%, during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016. The growth in company restaurant revenues was primarily due to an increase in
the
non-comparable
restaurant base (net additions of 15 company-operated restaurants at September 24, 2017 compared to September 25, 2016) accounting for $17.5 million, partially offset by a
decrease in comparable company restaurant sales of $11.9 million, or 3.4%, composed of a decrease in transactions, partially offset by increases in price at our comparable restaurants.
Franchise Royalty Revenues
Franchise royalty
revenues increased $1.0 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016. The increase was primarily due to a net additional 35 franchised restaurants at
September 24, 2017 compared to September 25, 2016, partially offset by a decrease in franchised comparable restaurant sales of 0.7%.
31
Other Franchise Revenues
Other franchise revenues increased $0.3 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended
September 25, 2016. The increase was primarily due to franchise fees related to the refranchising of five company-operated restaurants, as well as the timing of the opening of franchised restaurants.
Food and Supplies Costs
Food and supplies costs
increased $2.3 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016. 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 thirty-nine weeks ended September 24, 2017 was 31.5% versus 31.4% during the thirty-nine weeks ended September 25, 2016. This increase was primarily due to commodity
inflation and menu mix changes, partially offset by our menu price increases.
Restaurant Labor Costs
Company-operated restaurant labor costs increased $7.4 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine
weeks ended September 25, 2016, primarily due to an increase in the number of company-operated restaurants and wage inflation. As a percentage of company restaurant revenues, restaurant labor costs increased to 29.2% during the thirty-nine
weeks ended September 24, 2017 from 27.6% during the thirty-nine weeks ended September 25, 2016. This increase was primarily driven by an increase in direct labor, partially offset by lower incentive compensation.
We expect that our restaurant labor costs will continue to increase due to the tightening labor market and higher medical costs, as well as certain labor
initiatives across company-operated restaurants, including service enhancements and 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 increasing the
salaries of certain of our team members in November 2016 and overall labor inflation. The foregoing November 2016 salary increase was in response to proposed DOL regulations related to overtime and exempt versus
non-exempt
classification that were ultimately invalidated. We may incur increased labor costs if the DOL were to propose new regulations and those regulations are adopted and implemented.
Operating Costs
Operating costs increased
$6.8 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25, 2016, primarily due to an increase in the number of company-operated restaurants. As a percentage of company
restaurant revenues, operating costs increased to 23.9% during the thirty-nine weeks ended September 24, 2017 from 22.5% during the thirty-nine weeks ended September 25, 2016. This increase was primarily due to higher occupancy and
utilities costs, as well as our uniform refresh program.
Restaurant Depreciation and Amortization
Restaurant depreciation and amortization increased $0.7 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine
weeks ended September 25, 2016, due primarily to the increased number of company-operated restaurants. As a percentage of company restaurant revenues, depreciation and amortization was 2.7% and 2.5% during the thirty-nine weeks ended
September 24, 2017 and September 25, 2016, respectively.
32
General and Administrative Expenses
General and administrative expenses increased $0.4 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks
ended September 25, 2016. The increase during the thirty-nine weeks ended September 24, 2017 was due primarily to $0.5 million of higher expense recorded in connection with the identification and due diligence of potential new
locations for company-operated restaurants that we ultimately decided not to pursue, $0.4 million of higher executive separation expenses, $0.2 million of higher stock-based compensation expense, $0.2 million of higher employee
relocation expenses and headcount added to support an increased number of restaurants in our system, partially offset by lower incentive compensation. As a percentage of total revenues, general and administrative expenses was 7.2% during each of the
thirty-nine weeks ended September 24, 2017 and September 25, 2016.
We expect our recurring general and administrative expenses will increase as
we grow our business and incur additional expenses related to being a newer public company.
Interest Expense
Interest expense decreased $1.0 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended
September 25, 2016. The decrease was due primarily to principal payments of $35.4 million on our long-term debt from September 26, 2016 to September 24, 2017, a reduction in our applicable rate and lower interest expense
associated with interest rate swaps, partially offset by an increase in the LIBOR rate.
Income Taxes
Income taxes decreased $4.9 million during the thirty-nine weeks ended September 24, 2017 compared to the thirty-nine weeks ended September 25,
2016. Our effective income tax rates were 28.2% and 33.4% during the thirty-nine weeks ended September 24, 2017 and September 25, 2016, respectively. The effective income tax rates for the thirty-nine weeks ended September 24, 2017
and September 25, 2016 reflect a deferred income tax benefit due to a reduction in the North Carolina corporate income tax rate and the recognition of certain tax credits. In addition, the income tax rate for the thirty-nine weeks ended
September 24, 2017 reflects the recognition of $1.7 million of excess tax benefits associated with the exercise of stock options and vesting of restricted stock units.
Contractual Obligations
During the thirty-nine weeks
ended September 24, 2017, 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 25, 2016, 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 $30 thousand and $0.1 million at September 24, 2017 and December 25, 2016, respectively.
Emerging Growth Company
We are an emerging growth
company, as defined in Section 2(a) of the Securities Act of 1933, as amended (the Securities Act) and 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,
33
including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, 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 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 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 $1.07 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 consolidated financial statements. The
preparation of our consolidated 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 consolidated financial statements. A thorough understanding of these accounting policies is essential when
reviewing our reported results of operations and our financial position. Management believes that the critical accounting policies and estimates discussed herein 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 condensed 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 25, 2016.
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
will not early adopt ASU
2014-09.
ASU
2014-09
permits two transition approaches: full retrospective or modified retrospective. We expect to utilize the full
retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients. We have completed a preliminary review of ASU
2014-09
and
do not expect the adoption of ASU
2014-09
to have a material impact on our company restaurant revenues or franchise royalty revenues. We expect the adoption of ASU
2014-09
will require us to recognize
34
initial and renewal franchisee fees on a straight-line basis over the life of the franchise agreement, which will impact our other franchise revenues. In addition, we anticipate funds contributed
by franchisees to the advertising funds we manage, as well as the associated advertising fund expenditures, will be reported on a gross basis, and the advertising fund revenues and expenses may be reported in different periods.
In February 2016, the FASB issued ASU
2016-02,
Leases (Topic 842)
(ASU
2016-02),
which requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. ASU
2016-02
establishes a
right-of-use
model (ROU) that requires a lessee to recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer
than twelve months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations. ASU
2016-02
is
effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We expect to adopt ASU
2016-02
on December 31,
2018, which is the first day of our fiscal year 2019. A modified retrospective transition is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain
practical expedients available. We expect that ASU
2016-02
will have a material effect on our condensed consolidated financial statements. While we are continuing to assess the impact of adoption, we currently
believe the most significant changes relate to (1) the recognition of new ROU assets and lease liabilities on our condensed consolidated balance sheet for real estate and equipment operating leases and (2) the derecognition of existing
assets and liabilities for certain assets under construction in
build-to-suit
lease arrangements that we will lease when construction is complete.
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. We adopted ASU
2016-09
prospectively
during the first fiscal quarter of 2017, and the adoption did not have a significant impact on the condensed consolidated financial statements. We expect the adoption of ASU
2016-09
to cause volatility in our
effective tax rates and diluted net income per share due to the tax effects related to share-based payments being recorded to the condensed consolidated statement of operations and comprehensive income. The volatility in future periods will depend
on the price of our common stock on the date awards are exercised or vest and the number of awards that are exercised or vest in each period. In addition, the adoption of ASU
2016-09
resulted in an increase in
the weighted average number of common shares outstanding used for computing diluted net income per share as tax effects related to share-based payments are no longer considered assumed proceeds when calculating dilutive potential common shares using
the treasury-stock method.
The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, financial statement
presentation, financial instruments and hedging. Some of the proposed changes are significant and could have a material impact on our reporting. We have not yet fully evaluated the potential impact of all of these proposals, but will make such an
evaluation as the standards are finalized.
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 primarily 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 do
have accounts receivable from our franchisees, which are primarily related to royalty revenues, as well as from certain vendors.
35
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
utilize a
build-to-suit
development strategy, our new restaurant strategy may change over time. The average investment for new company-operated restaurants has increased
during fiscal year 2017 primarily due to higher land costs, inflation and the incorporation of certain design features of our Bojangles of the Future into our company-operated restaurant construction projects.
We currently expect our cash capital expenditures for fiscal year 2017 will range between $12.0 million and $13.0 million excluding approximately
$1.5 million to $1.6 million of restaurant preopening costs for restaurants that are not capitalized. These capital estimates are based on restaurant capital expenditures for the opening of 25 to 26 company-operated restaurants as well as
investments to remodel and improve our existing restaurants, investments in technology and expenditures for general corporate purposes. We continue to evaluate our long-term growth strategy related to the opening of new company-operated restaurants
and the proportion of company-operated restaurants and franchised units. During fiscal year 2018, and for the foreseeable future, we expect to open fewer new company-operated restaurants than we have in recent fiscal years.
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.
The following table presents summary cash flow information for the
periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
September 24,
2017
|
|
|
September 25,
2016
|
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
36,818
|
|
|
$
|
42,781
|
|
Investing activities
|
|
|
(7,328
|
)
|
|
|
(6,001
|
)
|
Financing activities
|
|
|
(25,666
|
)
|
|
|
(31,564
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
$
|
3,824
|
|
|
$
|
5,216
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
Net cash provided by operating activities decreased from $42.8 million during the thirty-nine weeks ended September 25, 2016 to $36.8 million
during the thirty-nine weeks ended September 24, 2017. The decrease was primarily attributable to a decline in cash generated from our operations and higher estimated federal income tax payments in relation to our taxable income, partially
offset by an increase in franchise royalty revenues.
Investing Activities
Net cash used in investing activities increased from $6.0 million during the thirty-nine weeks ended September 25, 2016 to $7.3 million during
the thirty-nine weeks ended September 24, 2017. The increase was attributable to higher purchases of property and equipment, including expenditures related to new and remodeled company-operated restaurants, as well as our technology
initiatives.
36
Financing Activities
Net cash used in financing activities decreased from $31.6 million during the thirty-nine weeks ended September 25, 2016 to $25.7 million during
the thirteen weeks ended September 24, 2017. This decrease was primarily due to $7.4 million of lower principal payments on long-term debt and $1.5 million of higher proceeds from the exercise of stock options, partially offset by
$1.1 million of higher principal payments on capital lease obligations and a $1.8 million decrease in the excess tax benefit from stock-based compensation which, beginning in fiscal year 2017, is now recorded in the condensed consolidated
statement of operations and comprehensive income.
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 an initial 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. On October 19,
2016, we further amended the Credit Agreement to, among other things, increase allowable indebtedness associated with capital lease obligations, synthetic lease obligations and purchase money obligations, as well as to increase allowable cash
capital expenditures during each fiscal year. We had $135.1 million of outstanding term loans and no outstanding borrowings under our revolving credit facility as of September 24, 2017.
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 September 24, 2017, all of our outstanding term loan debt was in
one-month
Eurodollar loans with an interest rate of approximately 3.24%.
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 September 24, 2017.
Hedging
Arrangements
In connection with our Credit Agreement, as of September 24, 2017, we have two
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 paid interest fixed at 1.3325% and received 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.
Share Repurchase Program
On October 31, 2017, our
board of directors authorized a share repurchase program under which we may purchase up to $50.0 million of our outstanding common stock through April 30, 2019. The purchases may be made from time to time in the open market (including, without
limitation, the use of Rule 10b5-1 plans), depending on a number of factors, including our evaluation of general market and economic conditions, the trading price of the common stock, regulatory requirements, and compliance with the terms of our
outstanding indebtedness. The share repurchase program may be extended, modified, suspended or discontinued at any time. We expect to fund the share repurchase program with either, or a combination of, existing cash on hand, cash generated from
operations, and borrowings under our revolving line of credit.
37