Del Taco Results

Del Taco Restaurants, Inc. Reports Fiscal Third Quarter 2018 Financial Results

System-wide comparable restaurant sales grew 1.4%, marking the 20th consecutive quarter of gains

Del Taco

Del Taco Restaurants, Inc., (NASDAQ: TACO), the second largest Mexican-American quick service restaurant chain by units in the United States, today reported fiscal third quarter 2018 financial results. The Company also updated its guidance for fiscal year 2018.

Fiscal Third Quarter 2018 Highlights

  • System-wide comparable restaurant sales grew 1.4%, marking the 20th consecutive quarter of gains;
    • Company-operated comparable restaurant sales grew 0.3%, marking the 25th consecutive quarter of gains. Company-operated comparable restaurant sales growth was comprised of average check growth of 2.9%, partially offset by a transaction decrease of 2.6%;
    • Franchised comparable restaurant sales grew 3.0%;
  • Total revenue increased 6.2% to $117.8 million (including $3.2 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 fiscal first quarter whereby the offsetting impact is an increase to expenses such that there is no impact on operating income and net income) compared to $111.0 million in the fiscal third quarter 2017;
  • Company restaurant sales increased 3.1% to $109.6 million compared to $106.3 million in the fiscal third quarter 2017;
  • Net income was $5.9 million, or $0.15 per diluted share, compared to $5.1 million in the fiscal third quarter 2017, or $0.13 per diluted share;
  • Adjusted net income* was $6.0 million, or $0.15 per diluted share, compared to $5.1 million in the fiscal third quarter 2017, or $0.13 per diluted share;
  • Restaurant contribution* margin increased 70 basis points to 19.9% compared to 19.2% in the fiscal third quarter 2017; and
  • Adjusted EBITDA* increased 6.4% to $17.7 million compared to $16.6 million in the fiscal third 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 made strategic progress led by the launch of Elevated Combined Solutions which furthers our mission to be the leader in the value oriented QSR+ segment. We again experienced strong franchise comparable restaurant sales trends demonstrating our strengthening franchise system which supports brand portability. We remained focused on strengthening our great culture with the launch of our company values and our new advertising campaign centered on real employees. And, despite soft company-operated comparable restaurant sales, our effective margin management strategy helped us deliver an improved restaurant contribution margin after adjusting for the favorable timing of advertising expenses.”

Cappasola continued, “Although the new $1 Chicken Quesadilla Snacker did not support check or transaction trends during the third quarter, our flexible barbell menu strategy allowed us to quickly pivot to mid-tier and premium products which achieved an immediate improvement in menu mix. As we enter the fourth quarter our plan to generate transaction momentum includes the launch of Shredded Beef as a limited time offer, which has already sequentially improved our trends, and premium innovation with a new Triple Meat Epic Burrito. Still, we have opted to take a more cautious approach to our fiscal year outlook and have therefore updated our annual guidance.”

Cappasola concluded, “Next month, we will launch our Del Taco mobile app and begin offering delivery in the Los Angeles market through GrubHub, followed by a system-wide launch in 2019 that will include partnerships with Postmates and DoorDash. We believe delivery will provide another convenient channel to enjoy our fresh, high quality food and that moving toward a multiple delivery service provider approach will position us to maximize consumer demand.”

Review of Fiscal Third Quarter 2018 Financial Results

Total revenue increased 6.2% to $117.8 million (including $3.2 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 fiscal first quarter whereby the offsetting impact is an increase to expenses such that there is no impact on operating income and net income) compared to $111.0 million in the fiscal third quarter 2017. Excluding these revenue recognition impacts, total revenue increased 3.1%.

Comparable restaurant sales increased 1.4% system-wide, resulting in a 5.5% increase on a two-year basis. The Del Taco system has now generated comparable restaurant sales growth for 20 consecutive quarters. Company-operated comparable restaurant sales increased 0.3%, marking 25 consecutive quarters of comparable restaurant sales growth. Franchise comparable restaurant sales increased 3.0%, reflecting the strength of our system across a diverse geographic footprint.

Net income was $5.9 million, representing $0.15 per diluted share, compared to $5.1 million in the fiscal third quarter 2017, representing $0.13 per diluted share.

Adjusted net income* was $6.0 million, or $0.15 per diluted share, compared to $5.1 million in the fiscal third quarter 2017, or $0.13 per diluted share.

Restaurant contribution* was $21.8 million compared to $20.4 million in the fiscal third quarter 2017. As a percentage of Company restaurant sales, restaurant contribution margin increased approximately 70 basis points year-over-year to 19.9%. The increase was the result of an approximate 90 basis point decrease in food and paper costs and a 40 basis point decrease in occupancy and other operating expenses, which was due to the timing of advertising expenses, offset by an approximate 60 basis point increase in labor and related expenses.

Adjusted EBITDA* increased 6.4% to $17.7 million compared to $16.6 million in the fiscal third quarter 2017.

Restaurant Portfolio

During the fiscal third quarter 2018, we opened two company-operated restaurants and three franchised restaurants and closed three company-operated restaurants and one franchised restaurant. We also purchased three restaurants from franchisees.

Thus far in the fiscal fourth quarter 2018, we have opened two company-operated restaurants and there are currently 17 restaurants (eleven franchised and six company) under construction, of which 13 to 16 are expected to open this fiscal year.

Repurchase Program for Common Stock and Warrants

During the fiscal third quarter 2018, we repurchased 235,041 shares of common stock at average price of $12.74 per share for a total of $3.0 million, and repurchased 5,972 warrants at an average price per warrant of $3.07. At the end of the fiscal third quarter approximately $38.1 million remained under our $75 million repurchase authorization.

Updated Fiscal Year 2018 Guidance

We are updating our guidance for fiscal year 2018, which is a 52-week period ending January 1, 2019.

  • System-wide same store sales growth of approximately 3% (previously 2% to 4%);
  • Total revenue between $504 million and $507 million (previously $506 to $516 million), reflecting the new revenue recognition rules adopted in the first fiscal quarter 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 $470 million and $473 million (previously $473 to $483 million);
  • Restaurant contribution margin between 19.3% and 19.5% (previously 19.3% to 19.8%);
  • General and administrative expenses between approximately 8.5% and 8.7% of total revenue (previously 8.2% to 8.5%), including the expense side of the other franchise revenue that will now be reported on a gross basis;
  • Effective tax rate of approximately 26.0% to 27.0% (previously 26.5% to 27.5%);
  • Adjusted diluted earnings per share of approximately $0.53 to $0.56 (previously $0.59 to $0.63);
  • Adjusted EBITDA between $70.5 million and $71.5 million (previously $71.5 to $74.0 million);
  • 25 to 28 new system-wide restaurant openings; and
  • Net capital expenditures between $39.0 million to $42.0 million (previously $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.

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, restaurant closure charges, and other income related to the write-off of unfavorable lease liabilities, net of tax. Adjusted diluted net income per share represents company diluted net income per share before impairment of long-lived assets, restaurant closure charges, and other income related to the write-off of unfavorable lease liabilities, net of tax.

 

 

Del Taco Restaurants, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)

 

September 11, 2018

January 2, 2018
Assets

(unaudited)

Current assets:

Cash and cash equivalents

$ 6,628

$ 6,559
Accounts and other receivables, net

3,565

3,828
Inventories

2,596

2,712
Prepaid expenses and other current assets

  4,793

  6,784
Total current assets

17,582

19,883
Property and equipment, net

172,094

156,124
Goodwill

321,531

320,638
Trademarks

220,300

220,300
Intangible assets, net

19,450

21,498
Other assets, net

  4,562

  3,881
Total assets

$ 755,519

$ 742,324

 
Liabilities and shareholders' equity

Current liabilities:

Accounts payable

$ 20,172

$ 18,759
Other accrued liabilities

40,706

35,257

Current portion of capital lease obligations and deemed landlord financing liabilities

  1,109

  1,415
Total current liabilities

61,987

55,431
Long-term debt, capital lease obligations and deemed landlord financing

liabilities, excluding current portion, net

169,174

170,639
Deferred income taxes

69,137

68,574
Other non-current liabilities

  31,945

  31,431
Total liabilities

332,243

326,075

 
Shareholders' equity:

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

issued and outstanding

Common stock, $0.0001 par value; 400,000,000 shares authorized; 38,066,801 shares issued and

outstanding at September 11, 2018; 38,434,274 shares issued and outstanding at January 2, 2018

4

4
Additional paid-in capital

343,412

349,334
Accumulated other comprehensive income

357

14
Retained earnings

  79,503

  66,897
Total shareholders' equity

  423,276

  416,249
Total liabilities and shareholders' equity

$ 755,519

$ 742,324

 

 

 

 

 

Del Taco Restaurants, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands, except share and per share data)

 

12 Weeks Ended

36 Weeks Ended

September 11, 2018

September 12, 2017

September 11, 2018

September 12, 2017
Revenue:

Company restaurant sales

$ 109,559

$ 106,298

$ 324,468

$ 311,542

Franchise revenue

4,308

3,978

12,249

11,494

Franchise advertising contributions

3,155

9,227

Franchise sublease income

  808  

  712  

  2,253  

  1,878  
Total revenue

117,830

110,988

348,197

324,914

Operating expenses:

Restaurant operating expenses:

Food and paper costs

29,601

29,648

88,656

86,336

Labor and related expenses

35,301

33,635

105,541

100,041

Occupancy and other operating expenses

22,844

22,608

67,457

64,243

General and administrative

9,606

8,817

30,356

27,177

Franchise advertising expenses

3,155

9,227

Depreciation and amortization

5,855

5,522

17,616

15,903

Occupancy and other - franchise subleases

762

654

2,051

1,738

Pre-opening costs

259

354

900

531

Impairment of long-lived assets

1,661

Restaurant closure charges, net

672

(16 )

635

(1 )
Loss on disposal of assets, net

  580  

  233  

  760  

  524  
Total operating expenses

  108,635  

  101,455  

  324,860  

  296,492  
Income from operations

9,195

9,533

23,337

28,422

Other expense, net

Interest expense

2,062

1,628

5,984

4,798

Other income

  (523 )

   

  (523 )

   
Total other expense, net

  1,539  

  1,628  

  5,461  

  4,798  
Income from operations before provision for income taxes

7,656

7,905

17,876

23,624

Provision for income taxes

  1,782  

  2,804  

  4,563  

  8,955  
Net income

5,874

5,101

13,313

14,669

Other comprehensive income (loss):

Change in fair value of interest rate cap, net of tax

23

(35 )

312

(271 )
Reclassification of interest rate cap amortization included in

net income

  15  

   

  31  

   
Total other comprehensive income (loss)

  38  

  (35 )

  343  

  (271 )
Comprehensive income

$ 5,912  

$ 5,066  

$ 13,656  

$ 14,398  
Earnings per share:

Basic

$ 0.15

$ 0.13

$ 0.35

$ 0.38

Diluted

$ 0.15

$ 0.13

$ 0.34

$ 0.37

Weighted-average shares outstanding

Basic

38,191,335

38,695,099

38,310,842

38,744,963

Diluted

39,391,284

39,839,571

39,108,573

40,016,062

 

 

 

 

 

Del Taco Restaurants, Inc.
Reconciliation of Net Income to EBITDA and Adjusted EBITDA
(Unaudited)
(In thousands)

 

12 Weeks Ended

36 Weeks Ended

September 11, 2018

September 12, 2017

September 11, 2018

September 12, 2017
Net income

$ 5,874

$ 5,101

$ 13,313

$ 14,669

Non-GAAP adjustments:

Provision for income taxes

1,782

2,804

4,563

8,955

Interest expense

2,062

1,628

5,984

4,798

Depreciation and amortization

  5,855  

  5,522  

  17,616  

  15,903  
EBITDA

  15,573  

  15,055  

  41,476  

  44,325  
Stock-based compensation expense (a)

1,445

1,191

4,079

3,340

Loss on disposal of assets, net (b)

580

233

760

524

Restaurant closure charges, net (c)

672

(16 )

635

(1 )

 
Amortization of favorable and unfavorable lease assets and liabilities, net (d)

(352 )

(229 )

(602 )

(521 )
Pre-opening costs (e)

259

354

900

531

Impairment of long-lived assets (f)

1,661

Other income (g)

  (523 )

   

  (523 )

   
Adjusted EBITDA

$ 17,654  

$ 16,588  

$ 48,386  

$ 48,198  

 
(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 gains or losses recorded associated with the sale of company-operated stores to franchisees.
(c) Includes costs related to future obligations associated with the closure or net sublease shortfall of a restaurant and lease termination costs, partially offset by sublease income from leases which are treated as deemed landlord financing.
(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.
(g) Other income consists of a gain related to the write-off of unfavorable lease liabilities related to franchise subleases which were terminated in connection with the Company's acquisition of the related franchise-operated restaurants.
 

     

 

 

 

Del Taco Restaurants, Inc.
Reconciliation of Company Restaurant Sales to Restaurant Contribution
(Unaudited)
(In thousands)

 

12 Weeks Ended

36 Weeks Ended

September 11, 2018

September 12, 2017

September 11, 2018

September 12, 2017
Company restaurant sales

$ 109,559

$ 106,298

$ 324,468

$ 311,542

Restaurant operating expenses

  87,746  

  85,891  

  261,654  

  250,620  
Restaurant contribution

$ 21,813  

$ 20,407  

$ 62,814  

$ 60,922  
Restaurant contribution margin

  19.9 %

  19.2 %

  19.4 %

  19.6 %

 

 

 

 

 

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

September 11, 2018

September 12, 2017

$

Per Share

$

Per Share
Net income and diluted earnings per share, as reported

$ 5,874

$ 0.15

$ 5,101

$ 0.13
Impairment of long-lived assets (a)

Restaurant closure charges, net (b)

672

0.02

(16 )

Other income (c)

(523 )

(0.01 )

Tax impact of adjustment (d)

  (40 )

   

   

 
Non-GAAP adjusted net income and adjusted diluted earnings per share

$ 5,983  

$ 0.15  

$ 5,085  

$ 0.13

 

 

36 Weeks Ended

36 Weeks Ended

September 11, 2018

September 12, 2017

$

Per Share

$

Per Share
Net income and diluted earnings per share, as reported

$ 13,313

$ 0.34

$ 14,669

$ 0.37
Impairment of long-lived assets (a)

1,661

0.04

Restaurant closure charges, net (b)

635

0.02

(1 )

Other income (c)

(523 )

(0.01 )

Tax impact of adjustment (d)

  (479 )

  (0.01 )

   

 
Non-GAAP adjusted net income and adjusted diluted earnings per share

$ 14,607  

$ 0.37  

$ 14,668  

$ 0.37

 
(a) Includes costs related to impairment of long-lived assets.
(b) Includes costs related to future obligations associated with the closure or net sublease shortfall of a restaurant and lease termination costs, partially offset by sublease income from leases which are treated as deemed landlord financing.
(c) Other income consists of a gain related to the write-off of unfavorable lease liabilities related to franchise subleases which were terminated in connection with the Company's acquisition of the related franchise-operated restaurants.
(d) Represents the income tax associated with the adjustments in (a) through (c) that are deductible for income tax purposes.
 

 

 

 

 

Del Taco Restaurants, Inc.
Restaurant Development

 

12 Weeks Ended

36 Weeks Ended

September 11,

2018

September 12,

2017

September 11,

2018

September 12,

2017

Company-operated restaurant activity:

Beginning of period

315

304

312

310

Openings

2

2

6

3

Closures

(3 )

(1 )

(4 )

(3 )
Purchased from franchisees

3

3

Sold to franchisees

 

 

 

(5 )
Restaurants at end of period

317  

305  

317  

305  
Franchise-operated restaurant activity:

Beginning of period

251

251

252

241

Openings

3

2

4

7

Closures

(1 )

(3 )

Purchased from Company

5

Sold to Company

(3 )

 

(3 )

 
Restaurants at end of period

250  

253  

250  

253  
Total restaurant activity:

Beginning of period

566

555

564

551

Openings

5

4

10

10

Closures

(4 )

(1 )

(7 )

(3 )
Restaurants at end of period

567  

558  

567  

558  

 



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