Diversified Restaurant Holdings Results

Diversified Restaurant Holdings Reports Second Quarter 2018 Results

Same-store sales declined 6.4%

Diversified Restaurant Holdings

Diversified Restaurant Holdings, Inc. (Nasdaq: SAUC), one of the largest franchisees for Buffalo Wild Wingswith 65 stores across five states, today announced results for its second quarter ended July 1, 2018.

Second Quarter Information (from continuing operations)

  • Revenue totaled $37.0 million
  • Same-store sales declined 6.4%
  • Net loss was $1.1 million or $0.04 per diluted share
  • Restaurant-level EBITDA(1) was $5.5 million, or 15.0% of sales
  • Adjusted EBITDA(1) was $3.7 million
  • Total debt of $108.2 million was down $5.8 million for the year-to-date period

“Our second quarter results reflect the ongoing headwinds that the Buffalo Wild Wings system is facing in the short-term while our franchisor, under new ownership, works to realign media and promotional strategies and reinvigorate the brand,” commented David G. Burke, President and CEO. “Despite the current challenges, we remain optimistic about a turnaround in sales trends as a result of the improved corporate marketing strategy planned for the upcoming football season along with the many other positive developments that are being tested and implemented, from advertising to information technology to menu innovation. We also expect to realize cost benefits as we participate in the leverage from our franchisor’s larger scale and buying power. We expect that the impact from these efforts will begin to be realized in our results later in the year as changes are implemented and gain traction.”

Mr. Burke added, “Given the current operating environment and our anticipated cash outlays for debt repayment and capital improvements, we felt it was prudent to complete an equity offering. The approximately $4.7 million in net proceeds that was recently raised provides confidence that our current cash balance, in addition to our cash flow from operations, will be sufficient to fund our operations, meet our commitments on our existing debt and ensure ongoing debt covenant compliance.”

Second Quarter Results (from continuing operations)
(Unaudited, $ in thousands)     Q2 2018     Q2 2017     Change     % Change  
Revenue $ 37,039.1 $ 39,934.6 $ (2,895.5 ) (7.3 )%
Operating income $ 294.7 $ 721.3 $ (426.6 ) (59.0 )%
Operating margin 0.8 % 1.8 %
Net loss $ (1,140.2 ) $ (291.3 ) $ (848.9 ) 291.4 %
Diluted net loss per share $ (0.04 ) $ (0.01 ) $ (0.03 ) 300.0 %
 
Same-store sales (6.4 )% (3.7 )%
 
Restaurant-level EBITDA(1) $ 5,540.2 $ 6,617.7 $ (1,077.5 ) (16.3 )%
Restaurant-level EBITDA margin 15.0 % 16.6 %
Adjusted EBITDA(1) $ 3,673.1 $ 4,622.7 $ (949.6 ) (20.5 )%
Adjusted EBITDA margin 9.9 % 11.6 %
 
Year-to-date Results (from continuing operations)
(Unaudited, $ in thousands) YTD 2018 YTD 2017 Change % Change  
Revenue $ 76,572.0 $ 84,272.6 $ (7,700.6 ) (9.1 )%
Operating income $ 1,798.5 $ 3,087.9 $ (1,289.4 ) (41.7 )%
Operating margin 2.3 % 3.7 %
Net income (loss) $ (948.4 ) $ 504.2   $ (1,452.6 ) (288.1 )%

Diluted net income (loss) per share

$ (0.04 ) $ 0.02   $ (0.06 ) (300.0 )%
 
Same-store sales(1) (7.5 )% (2.0 )%
 
Restaurant-level EBITDA(2) $ 12,438.3 $ 15,042.3 $ (2,604.0 ) (17.3 )%
Restaurant-level EBITDA margin 16.2 % 17.8 %
Adjusted EBITDA(2) $ 8,776.8 $ 10,780.5 $ (2,003.7 ) (18.6 )%
Adjusted EBITDA margin 11.5 % 12.8 %
 

 

The decrease in sales in the second quarter was the result of reduced traffic and the impact of the revenue deferral related to the Blazin' Rewards loyalty program, partially offset by a new restaurant opening late in second quarter of 2017 and a favorable calendar shift with Easter falling in the 2018 first quarter versus the second quarter in 2017.

General and administrative expenses as a percentage of sales increased to 5.8% in the second quarter from 5.2% due to lower sales volumes. Food, beverage and packaging costs as a percentage of revenue decreased 140 basis points to 28.5%, primarily due to lower traditional chicken wing costs. Average cost per pound for traditional bone-in chicken wings, DRH’s most significant input cost, decreased to $1.66 in the 2018 second quarter compared with $2.03 in the prior-year period.

Balance Sheet Highlights - Continuing Operations

Cash and cash equivalents were $2.5 million at July 1, 2018 compared with $4.4 million at 2017 year-end. Capital expenditures were $0.9 million during the first six months of 2018 and were for minor facility upgrades and general maintenance-type investments, as well as improvements to prepare an open space for sub-lease adjacent to one of our restaurants in the first quarter. DRH does not expect to build any new restaurants nor is it expected to complete any major remodels in 2018. As a result, the Company anticipates its capital expenditures will approximate $1.5 million in fiscal 2018.

Total debt was $108.2 million at the end of the quarter, down $5.8 million since 2017 year-end.

On July 24, 2018, the Company completed an underwritten registered public offering of 6 million shares of common stock at a public offering price of $1.00 per share, including 700,000 shares offered by a certain selling stockholder, for total Company gross proceeds of $5.3 million. DRH also granted the underwriter an option for a period of 30 days to purchase up to an additional 450,000 shares of its common stock to cover over-allotments, if any. DRH intends to use the net proceeds from the offering for working capital and general corporate purposes, which may include repayment of debt.

About Diversified Restaurant Holdings, Inc.

Diversified Restaurant Holdings, Inc. is one of the largest franchisees for Buffalo Wild Wings with 65 franchised restaurants in key markets in Florida, Illinois, Indiana, Michigan and Missouri. DRH’s strategy is to generate cash, reduce debt and leverage its strong franchise operating capabilities for future growth.

       

 DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

  CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
Three Months Ended Six Months Ended
July 1, 2018     June 25, 2017   July 1, 2018     June 25, 2017
Revenue $ 37,039,073 $ 39,934,602 $ 76,572,030   $ 84,272,566
Operating expenses
Restaurant operating costs (exclusive of depreciation and amortization shown separately below):
Food, beverage, and packaging costs 10,563,039 11,921,549 21,695,416 24,959,976
Compensation costs 10,167,398 10,168,376 20,332,053 21,133,906
Occupancy costs 2,806,370 2,838,826 5,750,210 5,732,677
Other operating costs 7,962,070 8,388,150 16,356,025 17,418,026
General and administrative expenses 2,137,772 2,066,409 4,359,741 4,423,375
Pre-opening costs 294,473 325,843
Depreciation and amortization 3,100,745 3,271,541 6,267,245 6,904,795
Loss on asset disposal 6,946   264,015   12,797   286,074  
Total operating expenses 36,744,340 39,213,339 74,773,487 81,184,672
 
Operating profit 294,733 721,263 1,798,543 3,087,894
 
Interest expense (1,609,987 ) (1,642,306 ) (3,256,031 ) (3,218,260 )
Other income, net 20,576   25,140   53,216   52,307  
 
Loss from continuing operations before income taxes (1,294,678 ) (895,903 ) (1,404,272 ) (78,059 )
Income tax benefit of continuing operations 154,468   604,560   455,891   582,296  
Income (loss) from continuing operations (1,140,210 ) (291,343 ) $ (948,381 ) $ 504,237
 
Discontinued operations
Loss from discontinued operations before income taxes (169,127 ) $ $ (132,592 )
Income tax benefit of discontinued operations   51,380     50,385  
Loss from discontinued operations (117,747 ) (82,207 )
 
Net income (loss) $ (1,140,210 ) $ (409,090 ) $ (948,381 ) $ 422,030  
 
Basic earnings per share from:
Continuing operations $ (0.04 ) $ (0.01 ) $ (0.04 ) $ 0.02
Discontinued operations $ $ (0.01 ) $ $
Basic net earnings per share $ (0.04 ) $ (0.02 ) $ (0.04 ) $ 0.02
 
Diluted earnings per share from:
Continuing operations $ (0.04 ) $ (0.01 ) $ (0.04 ) $ 0.02
Discontinued operations $ $ (0.01 ) $ $
Diluted net earnings per share $ (0.04 ) $ (0.02 ) $ (0.04 ) $ 0.02
Weighted average number of common shares outstanding
Basic 26,474,297 26,621,421 26,664,010 26,625,697
Diluted 26,474,297 26,621,421 26,664,010 26,625,697
 
       

 DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

  CONSOLIDATED BALANCE SHEETS

 
ASSETS

July 1, 2018

(UNAUDITED)

December 31,

2017

Current assets
Cash and cash equivalents $ 2,520,095 $ 4,371,156
Accounts receivable 278,876 653,102
Inventory 1,455,683 1,591,363
Prepaid and other assets 614,856   408,982  
Total current assets 4,869,510 7,024,603
 
Property and equipment, net 42,604,823 48,014,043
Intangible assets, net 2,248,372 2,438,187
Goodwill 50,097,081 50,097,081
Other long-term assets 808,145   185,322  
Total assets $ 100,627,931   $ 107,759,236  
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 3,454,367 $ 4,561,939
Accrued compensation 1,457,108 1,854,127
Other accrued liabilities 2,900,281 2,404,942
Current portion of long-term debt 11,570,551 11,440,433
Current portion of deferred rent 459,906   411,660  
Total current liabilities 19,842,213 20,673,101
 
Deferred rent, less current portion 2,354,782 2,208,238
Deferred income taxes 2,390,023 2,759,870
Unfavorable operating leases 470,788 510,941
Other long-term liabilities 1,835,244 2,346,991
Long-term debt, less current portion 96,585,984   102,488,730  
Total liabilities 123,479,034 130,987,871
 
Stockholders' deficit
Common stock - $0.0001 par value; 100,000,000 shares authorized; 27,282,385 and 26,633,299, respectively, issued and outstanding 2,648 2,625
Additional paid-in capital 22,156,108 21,776,402
Accumulated other comprehensive income (loss) 662,976 (283,208 )
Accumulated deficit (45,672,835 ) (44,724,454 )
Total stockholders' deficit (22,851,103 ) (23,228,635 )
   
Total liabilities and stockholders' deficit $ 100,627,931   $ 107,759,236  
 
   

 DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 
Six Months Ended
July 1, 2018     June 25, 2017
Cash flows from operating activities
Net income (loss) $

(948,381

) $

422,030

 

Net loss from discontinued operations  

(82,207

)
Net income (loss) from continuing operations

(948,381

)

504,237

Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 6,267,245 6,904,795
Amortization of debt discount and loan fees 144,717 104,970
Amortization of gain on sale-leaseback (104,071 ) (67,696 )
Loss on asset disposals 12,797 286,074
Share-based compensation 387,785 181,922
Deferred income taxes (456,087 ) (632,681 )
Changes in operating assets and liabilities that provided (used) cash
Accounts receivable 374,226 143,276
Inventory 135,680 33,233
Prepaid and other assets (205,874 ) 58,922
Intangible assets (20,000 ) (8,653 )
Other long-term assets (19,504 ) 40,822
Accounts payable (1,021,198 ) (75,913 )
Accrued liabilities 79,595 (941,964 )
Deferred rent 194,790   (4,448 )
Net cash provided by operating activities of continuing operations 4,821,720   6,526,896  
Net cash used in operating activities of discontinued operations   (82,207 )
Net cash provided by operating activities 4,821,720   6,444,689  
 
Cash flows from investing activities
Purchases of property and equipment (906,414 ) (3,571,296 )
Net cash used in investing activities (906,414 ) (3,571,296 )
 
Cash flows from financing activities
Proceeds from issuance of long-term debt 3,215,641
Repayments of long-term debt (5,758,311 ) (6,358,310 )
Proceeds from employee stock purchase plan 41,950 28,919
Tax withholdings for restricted stock units (50,006 )
Net cash used in financing activities (5,766,367 ) (3,113,750 )
 
Net decrease in cash and cash equivalents (1,851,061 ) (240,357 )
   
Cash and cash equivalents, beginning of period 4,371,156   4,021,126  
   
Cash and cash equivalents, end of period $ 2,520,095   $ 3,780,769  
 
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
Reconciliation between Net Income (Loss) and Adjusted EBITDA and Adjusted Restaurant-Level EBITDA
           
Three Months Ended (Unaudited) Six Months Ended (Unaudited)
      July 1, 2018     June 25, 2017     July 1, 2018     June 25, 2017
Net Income (Loss)     $ (1,140,210 )     $ (409,090 )     $ (948,381 )     $ 422,030  
+ Loss from discontinued operations 117,747 82,207
+ Income tax benefit (154,468 ) (604,560 ) (455,891 ) (582,296 )
+ Interest expense 1,609,987 1,642,306 3,256,031 3,218,260
+ Other income, net (20,576 ) (25,140 ) (53,216 ) (52,307 )
+ Loss on asset disposal 6,946 264,015 12,797 286,074
+ Depreciation and amortization     3,100,745       3,271,541       6,267,245       6,904,795  
EBITDA     $ 3,402,424       $ 4,256,819       $ 8,078,585       $ 10,278,763  
+ Pre-opening costs 294,473 325,843
+ Non-recurring expenses (Restaurant-level) 14,300
+ Non-recurring expenses (Corporate-level)     270,693       71,457       698,218       161,554  
Adjusted EBITDA     $ 3,673,117       $ 4,622,749       $ 8,776,803       $ 10,780,460  
Adjusted EBITDA margin (%) 9.9 % 11.6 % 11.5 % 12.8 %
+ General and administrative 2,137,772 2,066,409 4,359,741 4,423,375
+ Non-recurring expenses (Corporate-level)     (270,693 )     (71,457 )     (698,218 )     (161,554 )
Restaurant–Level EBITDA     $ 5,540,196       $ 6,617,701       $ 12,438,326       $ 15,042,281  
Restaurant–Level EBITDA margin (%) 15.0 % 16.6 % 16.2 % 17.8 %
 

Restaurant-Level EBITDA represents net income (loss) plus the sum of non-restaurant specific general and administrative expenses, restaurant pre-opening costs, loss on property and equipment disposals, depreciation and amortization, other income and expenses, interest, taxes, and non-recurring expenses. Adjusted EBITDA represents net income (loss) plus the sum of restaurant pre-opening costs, loss on property and equipment disposals, depreciation and amortization, other income and expenses, interest, taxes, and non-recurring expenses. We are presenting Restaurant-Level EBITDA and Adjusted EBITDA, which are not presented in accordance with GAAP, because we believe they provide additional metrics by which to evaluate our operations. When considered together with our GAAP results and the reconciliation to our net income, we believe they provide a more complete understanding of our business than could be obtained absent this disclosure. We use Restaurant-Level EBITDA and Adjusted EBITDA together with financial measures prepared in accordance with GAAP, such as revenue, income from operations, net income, and cash flows from operations, to assess our historical and prospective operating performance and to enhance the understanding of our core operating performance. Restaurant-Level EBITDA and Adjusted EBITDA are presented because: (i) we believe they are useful measures for investors to assess the operating performance of our business without the effect of non-cash depreciation and amortization expenses; (ii) we believe investors will find these measures useful in assessing our ability to service or incur indebtedness; and (iii) they are used internally as benchmarks to evaluate our operating performance or compare our performance to that of our competitors.

Additionally, we present Restaurant-Level EBITDA because it excludes the impact of general and administrative expenses and restaurant pre-opening costs, which is non-recurring. The use of Restaurant-Level EBITDA thereby enables us and our investors to compare our operating performance between periods and to compare our operating performance to the performance of our competitors. The measure is also widely used within the restaurant industry to evaluate restaurant level productivity, efficiency, and performance. The use of Restaurant-Level EBITDA and Adjusted EBITDA as performance measures permits a comparative assessment of our operating performance relative to our performance based on GAAP results, while 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. Companies within our industry exhibit significant variations with respect to capital structure and cost of capital (which affect interest expense and tax rates) and differences in book depreciation of property and equipment (which affect relative depreciation expense), including significant differences in the depreciable lives of similar assets among various companies. Our management team believes that Restaurant-Level EBITDA and Adjusted EBITDA facilitate company-to-company comparisons within our industry by eliminating some of the foregoing variations.

Restaurant-Level EBITDA and Adjusted EBITDA are not determined in accordance with GAAP and should not be considered in isolation or as an alternative to net income, income from operations, net cash provided by operating, investing, or financing activities, or other financial statement data presented as indicators of financial performance or liquidity, each as presented in accordance with GAAP. Neither Restaurant-Level EBITDA nor Adjusted EBITDA should be considered as a measure of discretionary cash available to us to invest in the growth of our business. Restaurant-Level EBITDA and Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies and our presentation of Restaurant-Level EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual items. Our management recognizes that Restaurant-Level EBITDA and Adjusted EBITDA have limitations as analytical financial measures.



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