Diversified Restaurant Holdings Results

Diversified Restaurant Holdings Reports Third Quarter 2018 Results

Diversified Restaurant Holdings

Diversified Restaurant Holdings, Inc. (Nasdaq: SAUC), one of the largest franchisees for Buffalo Wild Wings with 64 stores across five states, today announced results for its third quarter ended September 30, 2018.

Third Quarter Information (from continuing operations)

  • Revenue totaled $37.5 million; Same-store sales declined 5.2% (down 3.6% excluding major 2017 boxing event)
  • Net loss was $1.8 million or $0.06 per diluted share
  • Restaurant-level EBITDA(1) was $5.3 million or 14.2% of sales
  • Adjusted EBITDA(1) was $3.3 million or 8.7% of sales
  • Total debt of $105.3 million was down $8.7 million for the year-to-date period

(1)See attached table for a reconciliation of GAAP net loss to Restaurant-level EBITDA and Adjusted EBITDA

“New ownership at our franchisor has quickly put together a best-in-class team that has all of the right tools to drive the Buffalo Wild Wings brand forward. While our third quarter results are not at a level we are happy with and reflect the challenges we have faced this year, we are pleased to report that the efforts of new ownership continue to gain momentum and are starting to show positive results,” commented David G. Burke, President and CEO. “One of the first major initiatives has been the launch of our new fall football campaign that kicked off in September. Through the first month of our fourth quarter we have seen a nice uptick in sales, particularly on the weekends, with same-store sales for the month of October up 1.6%. While this performance is certainly a step in the right direction, we continue to believe that the more substantial effects will be realized as additional changes are implemented and gain traction. This includes improvements to food presentation, the menu, information technology and continued enhancements around advertising and promotions, especially as we move into the March Madness period early next year. And, as we approach the fall next year, we anticipate participating in a complete relaunch of the brand."

Mr. Burke added, "We expect that these initiatives will drive increasingly positive sales momentum for the brand which, in turn, will result in margin expansion driven by our significant operating leverage."

                 
Third Quarter Results (from continuing operations)
(Unaudited, $ in thousands) Q3 2018 Q3 2017 Change % Change
Revenue $ 37,491.8 $ 39,262.9 $ (1,771.1 ) (4.5 )%
Operating (loss) profit $ (682.5 ) $ 320.5 $ (1,003.0 ) (312.8 )%
Operating margin (1.8 )% 0.8 %
Net loss $ (1,761.4 ) $ (543.2 ) $ (1,218.2 ) 224.3 %
Diluted net loss per share $ (0.06 ) $ (0.02 ) $ (0.04 ) 200.0 %
 
Same-store sales(1) (5.2 )% (4.4 )%
 
Restaurant-level EBITDA(2) $ 5,311.9 $ 6,246.5 $ (934.6 ) (15.0 )%
Restaurant-level EBITDA margin 14.2 % 15.9 %
Adjusted EBITDA(2) $ 3,262.6 $ 4,322.0 $ (1,059.4 ) (24.5 )%
Adjusted EBITDA margin 8.7 % 11.0 %
 
Year-to-date Results (from continuing operations)
(Unaudited, $ in thousands) YTD 2018 YTD 2017 Change % Change
Revenue $ 114,063.8 $ 123,535.5 $ (9,471.7 ) (7.7 )%
Operating profit $ 1,116.0 $ 3,408.4 $ (2,292.4 ) (67.2 )%
Operating margin 1.0 % 2.8 %
Net loss $ (2,709.8 ) $ (39.0 ) $ (2,670.8 ) NM
Diluted net loss per share $ (0.10 ) $   $ (0.10 ) NM
 
Same-store sales(1) (6.8 )% (2.7 )%
 
Restaurant-level EBITDA(2) $ 17,750.2 $ 21,121.0 $ (3,370.8 ) (16.0 )%
Restaurant-level EBITDA margin 15.6 % 17.1 %
Adjusted EBITDA(2) $ 12,039.4 $ 14,934.6 $ (2,895.2 ) (19.4 )%
Adjusted EBITDA margin 10.6 % 12.1 %
 

(1) Q3 2017 and YTD 2017 same-store sales calculations exclude related closures in September 2017 from Hurricane Irma

(2) Please see attached table for a reconciliation of GAAP net loss to Restaurant-level EBITDA and Adjusted EBITDA

The decrease in sales in the third quarter was primarily the result of reduced traffic. The prior-year period also benefited from a significant boxing event that contributed 160 basis points to the same-store sales decline in the third quarter.

General and administrative expenses as a percentage of sales decreased 60 basis points to 5.3% in the third quarter due to lower corporate overhead and other efficiency initiatives.

Food, beverage, and packaging costs as a percentage of sales decreased 100 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 $1.67 in the 2018 third quarter compared with $2.14 in the prior-year period.

Higher average wages due to a tight labor market combined with lower average unit volumes resulted in compensation costs as a percent of sales increasing 200 basis points to 27.4% in the third quarter.

The Company recognized an impairment and loss on asset disposal of $0.9 million in the quarter, which reflects the impairment of fixed assets at one Missouri location.

Balance Sheet Highlights - Continuing Operations

Cash and cash equivalents were $7.1 million at September 30, 2018, compared with $4.4 million at the end of 2017. Capital expenditures were $1.3 million during the first nine 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 $105.3 million at the end of the quarter, down $8.7 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 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 64 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.

 

FINANCIAL TABLES FOLLOW

         

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 
Three Months Ended Nine Months Ended

September 30,

2018

   

September 24,

2017

 

September 30,

2018

   

September 24,

2017

Revenue $ 37,491,751 $ 39,262,940 $ 114,063,781 $ 123,535,506
 
Operating expenses

Restaurant operating costs (exclusive of depreciation and

amortization shown separately below):

Food, beverage, and packaging costs 10,692,796 11,569,925 32,388,212 36,529,901
Compensation costs 10,279,281 9,991,381 30,611,334 31,125,287
Occupancy costs 2,912,507 2,969,250 8,662,717 8,701,927
Other operating costs 8,461,334 8,770,406 24,817,359 26,188,432
General and administrative expenses 2,001,343 2,301,061 6,361,084 6,724,436
Pre-opening costs 79,605 405,448
Depreciation and amortization 2,908,608 3,244,255 9,175,853 10,149,050
Impairment and loss on asset disposal 918,399   16,578   931,196   302,652  
Total operating expenses 38,174,268 38,942,461 112,947,755 120,127,133
 
Operating (loss) profit (682,517 ) 320,479 1,116,026 3,408,373
 
Interest expense (1,609,277 ) (1,822,876 ) (4,865,308 ) (5,041,136 )
Other income, net 24,778   26,000   77,994   78,307  
Loss from continuing operations before income taxes (2,267,016 ) (1,476,397 ) (3,671,288 ) (1,554,456 )
Income tax benefit of continuing operations 505,644   933,157   961,535   1,515,453  
Loss from continuing operations (1,761,372 ) (543,240 ) $ (2,709,753 ) $ (39,003 )
 
Discontinued operations
Loss from discontinued operations before income taxes (22,960 ) $ $ (155,552 )
Income tax benefit of discontinued operations   7,806     58,191  
Loss from discontinued operations (15,154 ) (97,361 )
 
Net loss $ (1,761,372 ) $ (558,394 ) $ (2,709,753 ) $ (136,364 )
 
Basic earnings per share from:
Continuing operations $ (0.06 ) $ (0.02 ) $ (0.10 ) $
Discontinued operations $   $   $   $  
Basic net earnings per share $ (0.06 ) $ (0.02 ) $ (0.10 ) $  
 
Diluted earnings per share from:
Continuing operations $ (0.06 ) $ (0.02 ) $ (0.10 ) $
Discontinued operations $   $   $   $  
Diluted net earnings per share $ (0.06 ) $ (0.02 ) $ (0.10 ) $  
 
Weighted average number of common shares outstanding
Basic 30,643,240 26,764,776 27,990,420 26,672,057
Diluted 30,643,240 26,764,776 27,990,420 26,672,057
 
         

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

 
ASSETS

September 30,

2018

December 31,

2017

Current assets
Cash and cash equivalents $ 7,109,781 $ 4,371,156
Accounts receivable 304,339 653,102
Inventory 1,407,119 1,591,363
Prepaid and other assets 497,378   408,982  
Total current assets 9,318,617 7,024,603
 
Property and equipment, net 39,160,338 48,014,043
Intangible assets, net 2,219,698 2,438,187
Goodwill 50,097,081 50,097,081
Other long-term assets 967,574   185,322  
Total assets $ 101,763,308   $ 107,759,236  
 
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 3,727,263 $ 4,561,939
Accrued compensation 2,478,886 1,854,127
Other accrued liabilities 3,090,820 2,404,942
Current portion of long-term debt 11,513,280 11,440,433
Current portion of deferred rent 424,044   411,660  
Total current liabilities 21,234,293 20,673,101
 
Deferred rent, less current portion 2,392,669 2,208,238
Deferred income taxes 2,017,015 2,759,870
Unfavorable operating leases 450,712 510,941
Other long-term liabilities 1,795,725 2,346,991
Long-term debt, less current portion 93,787,074   102,488,730  
Total liabilities 121,677,488 130,987,871
 
Stockholders’ deficit:

Common stock - $0.0001 par value; 100,000,000 shares authorized; 32,577,262 and

26,859,125, respectively, issued and outstanding

3,179 2,625
Additional paid-in capital 26,849,631 21,776,402
Accumulated other comprehensive income (loss) 667,217 (283,208 )
Accumulated deficit (47,434,207 ) (44,724,454 )
Total stockholders’ deficit (19,914,180 ) (23,228,635 )
   
Total liabilities and stockholders’ deficit $ 101,763,308   $ 107,759,236  
 
     

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 
Nine Months Ended

September 30,

2018

   

September 24

2017

Cash flows from operating activities
Net loss $ (2,709,753 ) $ (136,364 )
Net loss from discontinued operations   (97,361 )
Net loss from continuing operations (2,709,753 ) (39,003 )

Adjustments to reconcile net loss from continuing operations to net cash provided

by operating activities:

Depreciation and amortization 9,175,853 10,149,050
Amortization of debt discount and loan fees 231,392 156,951
Amortization of gain on sale-leaseback (156,107 ) (99,657 )
Impairment and loss on asset disposals 931,196 302,652
Share-based compensation 505,433 284,100
Deferred income taxes (985,393 ) (1,573,644 )
Changes in operating assets and liabilities that provided (used) cash
Accounts receivable 348,763 172,395
Inventory 184,244 196,987
Prepaid and other assets (88,396 ) 134,593
Intangible assets (20,000 ) (28,729 )
Other long-term assets (8,312 ) 46,455
Accounts payable (753,767 ) 1,228,025
Accrued liabilities 1,274,271 (1,270,506 )
Deferred rent 196,815   137,342  
Net cash provided by operating activities of continuing operations 8,126,239   9,797,011  
Net cash used in operating activities of discontinued operations   (97,361 )
Net cash provided by operating activities 8,126,239   9,699,650  
 
Cash flows from investing activities
Purchases of property and equipment (1,276,122 ) (4,453,861 )
Net cash used in investing activities (1,276,122 ) (4,453,861 )
 
Cash flows from financing activities
Proceeds from issuance of long-term debt 4,650,965
Repayments of long-term debt (8,679,842 ) (9,237,466 )
Issuance of common stock, net of fees and expenses of $.7 million 4,579,781
Proceeds from employee stock purchase plan 58,920 45,005
Tax withholdings for restricted stock (70,351 ) (59,928 )
Net cash used in financing activities (4,111,492 ) (4,601,424 )
 
Net increase in cash and cash equivalents 2,738,625 644,365
   
Cash and cash equivalents, beginning of period 4,371,156   4,021,126  
   
Cash and cash equivalents, end of period $ 7,109,781   $ 4,665,491  
 
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
Reconciliation between Net Loss and Adjusted EBITDA and Adjusted Restaurant-Level EBITDA
                 
Three Months Ended (Unaudited) Nine Months Ended (Unaudited)
       

September 30,

2018

   

September 24,

2017

   

September 30,

2018

   

September 24,

2017

Net loss       $ (1,761,372 )     $ (558,394 )     $ (2,709,753 )     $ (136,364 )
+ Loss from discontinued operations 15,154 97,361
+ Income tax (benefit) (505,644 ) (933,157 ) (961,535 ) (1,515,453 )
+ Interest expense 1,609,277 1,822,876 4,865,308 5,041,136
+ Other income, net (24,778 ) (26,000 ) (77,994 ) (78,307 )
+ Impairment and loss on asset disposal 918,399 16,578 931,196 302,652
+ Depreciation and amortization       2,908,608       3,244,255       9,175,853       10,149,050  
EBITDA       $ 3,144,490       $ 3,581,312       $ 11,223,075       $ 13,860,075  
+ Pre-opening costs 79,605 405,448
+ Non-recurring expenses (Restaurant-level) 166,023 284,549 166,023 131,000
+ Non-recurring expenses (Corporate-level)       (47,880 )     376,530       650,338       538,083  
Adjusted EBITDA       $ 3,262,633       $ 4,321,996       $ 12,039,436       $ 14,934,606  
Adjusted EBITDA margin (%) 8.7 % 11.0 % 10.6 % 12.1 %
+ General and administrative 2,001,343 2,301,061 6,361,084 6,724,436
+ Non-recurring expenses (Corporate-level)       47,880       (376,530 )     (650,338 )     (538,083 )
Restaurant–Level EBITDA       $ 5,311,856       $ 6,246,527       $ 17,750,182       $ 21,120,959  
Restaurant–Level EBITDA margin (%) 14.2 % 15.9 % 15.6 % 17.1 %
 

Restaurant-Level EBITDA represents net income (loss) plus the sum of non-restaurant specific general and administrative expenses, restaurant pre-opening costs, impairment and 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, impairment and 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 (loss), 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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