Del Taco Results

Del Taco Restaurants, Inc. Reports Fiscal First Quarter 2019 Financial Results

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 first quarter 2019 financial results for the 12-week period ending March 26, 2019. Del Taco also reaffirmed its previously announced guidance for fiscal year 2019.

Fiscal First Quarter 2019 Highlights

  • System-wide comparable restaurant sales decreased 0.1%;
    • Company-operated comparable restaurant sales decreased 0.6%. Company-operated comparable restaurant sales were comprised of average check growth of 4.9%, including nearly 1% of menu mix growth, offset by a transaction decline of 5.5%;
    • Franchised comparable restaurant sales grew 0.4%;
  • Total revenue of $114.2 million representing 1.5% growth from the fiscal first quarter 2018;
  • Company-operated restaurant sales of $105.9 million representing 0.8% growth from the fiscal first quarter 2018;
  • Net income was $1.4 million, or $0.04 per diluted share, compared to $3.2 million, or $0.08 per diluted share, in the fiscal first quarter 2018;
  • Adjusted net income* was $1.7 million, or $0.04 per diluted share, compared to $3.2 million, or $0.08 per diluted share, in the fiscal first quarter 2018;
  • Restaurant contribution* margin of 15.8%, which includes an approximate 0.9% unfavorable impact from the adoption of the new lease accounting standard, compared to 18.4% in the fiscal first quarter 2018;
  • Adjusted EBITDA* of $12.1 million, which includes approximately $0.7 million of unfavorable impact from the adoption of the new lease accounting standard, compared to $13.9 million in the fiscal first quarter 2018; and
  • Four franchised restaurant openings and one franchised restaurant closure. The Company also purchased three franchised restaurants and refranchised 13 restaurants as part of its restaurant portfolio optimization program.

* 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, “While our Mix2 and seasonal seafood promotions performed well in the quarter, driving nearly 1% of menu mix at company-operated restaurants, comparable restaurant sales and transactions were adversely impacted by unfavorable weather in California and throughout the West, as well as a delayed Lenten season. However, our second quarter comparable restaurant sales have returned to positive territory as we cycled the Lenten calendar shift and began to benefit from our transaction-driving initiatives including our digital transformation, value evolution, and menu innovation. We are encouraged by this sequential improvement and are pleased to reaffirm our guidance for the full year.”

Cappasola continued, “Our new Del App now exceeds 500,000 registered users and we expect to expand its functionality to include online ordering for pickup or delivery this summer. Delivery is currently available through Grubhub at all company-operated restaurants and we plan to add Postmates and DoorDash later this year. During the quarter we enhanced our value platform with the March launch of $4, $5 and $6 ‘Fresh Faves’ box meals which were met with strong demand and we are incredibly excited about our most recent menu innovation, the Beyond Taco and Beyond Avocado Taco, which launched system-wide on April 25th. Our new Beyond Tacos are not only generating significant favorable media buzz, but also driving significant improvements in transaction and check average trends since they launched.”

Cappasola concluded, “We made material progress on our portfolio optimization strategy designed to stimulate new unit development and grow AUV’s, including commencing the marketing of certain company-operated restaurants across four non-core Western markets to the franchise M&A marketplace through our partnership with The Cypress Group. The Del Taco brand has proven portability across a broad geographic footprint and we believe refranchising our non-core Western markets provides potential franchise partners with an attractive entry point to our system from which they can drive further system-wide growth through new development.”

Review of Fiscal First Quarter 2019 Financial Results

Total revenue increased 1.5% to $114.2 million compared to $112.6 million in the fiscal first quarter 2018. Comparable restaurant sales decreased 0.1% system-wide, resulting in a 3.6% increase on a two-year basis. Company-operated comparable restaurant sales decreased 0.6% while franchise comparable restaurant sales increased 0.4%.

Net income was $1.4 million, representing $0.04 per diluted share, compared to $3.2 million in the fiscal first quarter 2018, representing $0.08 per diluted share.

Adjusted net income* was $1.7 million, or $0.04 per diluted share, compared to $3.2 million in the fiscal first quarter 2018, or $0.08 per diluted share.

Restaurant contribution* was $16.8 million compared to $19.3 million in the fiscal first quarter 2018. As a percentage of Company restaurant sales, restaurant contribution margin decreased 260 basis points year-over-year to 15.8%. The decrease was the result of an approximately 220 basis point increase in occupancy and other operating expenses and an approximately 80 basis point increase in labor and related expenses, partially offset by an approximately 40 basis point decrease in food and paper costs. Restaurant contribution margin included a negative impact of approximately 90 basis points due to the adoption of the new lease accounting standard.

Adjusted EBITDA* was $12.1 million compared to $13.9 million in the fiscal first quarter 2018 and includes approximately $0.7 million of unfavorable impact from the adoption of the new lease accounting standard.

Restaurant Development

During the fiscal first quarter 2019, there were four franchised restaurant openings and one franchised restaurant closure. Thus far in the fiscal second quarter 2019, the company has opened one company-operated restaurant and has nine additional system restaurants under construction. Del Taco also recently signed a new franchised development agreement for three restaurants in southern Brevard County, FL.

Repurchase Program for Common Stock and Warrants

During the fiscal first quarter 2019, the Company repurchased 270,874 shares of common stock at average price of $10.30 per share and repurchased 840,255 warrants at an average price per warrant of $1.78, for an aggregate of $4.3 million. At the fiscal quarter-end, approximately $25.4 million remained under our $75 million repurchase authorization.

Restaurant Portfolio Optimization

Del Taco is currently optimizing its restaurant portfolio to help stimulate growth in new restaurants and existing restaurant AUV’s. This includes the following actions that are expected to help shift our company ownership to approximately 45% by the summer of 2020.

  • During the fiscal first quarter of 2019, the Company purchased three high volume franchised restaurants for approximately $3.1 million and refranchised thirteen lower volume company-operated restaurants for net proceeds of approximately $2.1 million, all in the LA area.
  • Del Taco retained The Cypress Group, a leading restaurant and franchise investment banking firm, to manage the refranchising of certain company-operated restaurants across four non-core Western markets. The marketing process has commenced and is targeting new or existing franchise groups with proven restaurant operations capabilities and a strong, consistent track record of new unit development who commit to continued brand growth in existing and/or other markets. Because the exact timing of any refranchising transactions has not yet been determined, they are not embedded within our fiscal year 2019 guidance referenced below.

The Company also completed two sale-leaseback transactions for net proceeds totaling approximately $10.0 million during the fiscal first quarter of 2019.

Fiscal Year 2019 Guidance

Del Taco is reaffirming the following guidance for the 52-week fiscal year 2019 ending December 31, 2019. This guidance does not include any future refranchising transactions.

  • System-wide comparable restaurant sales growth of low-single digits;
  • Total revenue between $517 million and $527 million;
  • Company restaurant sales between $481 million and $491 million;
  • Restaurant contribution* margin between 18.1% and 18.6%, which includes approximately 70 basis points of unfavorable impact from the adoption of the new lease accounting standard;
  • General and administrative expenses between approximately 8.7% and 9.0% of total revenue;
  • Interest expense between approximately $7.2 million and $7.6 million;
  • Effective tax rate of approximately 26.5% to 27.5%;
  • Adjusted diluted earnings per share of approximately $0.47 to $0.52;
  • Adjusted EBITDA* is expected between $66.5 million and $69.0 million, which includes approximately $3.5 million of unfavorable impact from the adoption of the new lease accounting standard;
  • At least 25 gross system-wide new unit openings skewing toward franchised restaurants and an estimated 1% system-wide closure rate; and
  • Net capital expenditures between $42 million to $47 million.

About Del Taco Restaurants, Inc.

Del Taco (NASDAQ: TACO) offers a unique variety of both Mexican and American favorites such as burritos and fries, prepared fresh in every restaurant's working kitchen with the value and convenience of a drive-thru. Del Taco's menu items taste better because they are made with quality ingredients like fresh grilled chicken and carne asada steak, hand-sliced avocado, hand-grated cheddar cheese, slow-cooked beans made from scratch, and creamy Queso Blanco. Del Taco’s new advertising campaign, “Celebrating the Hardest Working Hands in Fast Food,” further communicates the company’s commitment to providing guests with fresh, quality food prepared by hand every day. Founded in 1964, today Del Taco serves more than three million guests each week at its more than 580 restaurants across 14 states.

Del Taco Restaurants, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
         
    March 26, 2019   January 1, 2019
Assets   (unaudited)    
Current assets:        
Cash and cash equivalents   $ 9,024   $ 7,153
Accounts and other receivables, net     3,215     3,167
Inventories     2,673     2,932
Prepaid expenses and other current assets     2,487     4,935
Assets held for sale     2,747     14,794
Total current assets     20,146     32,981
Property and equipment, net     149,549     161,429
Operating lease right-of-use assets     223,542    
Goodwill     324,120     321,531
Trademarks     220,300     220,300
Intangible assets, net     11,691     18,507
Other assets, net     4,158     4,208
Total assets   $ 953,506   $ 758,956
         
Liabilities and shareholders' equity        
Current liabilities:        
Accounts payable   $ 19,014   $ 19,877
Other accrued liabilities     32,901     34,785

Current portion of finance lease obligations, other debt and deemed landlord financing liabilities

    481     1,033
Current portion of operating lease liabilities     20,146    
Total current liabilities     72,542     55,695

Long-term debt, finance lease obligations, other debt and deemed landlord financing liabilities, excluding current portion, net

    154,573     178,664
Operating lease liabilities     217,967    
Deferred income taxes     70,332     69,471
Other non-current liabilities     15,396     32,852
Total liabilities     530,810     336,682
         
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; 37,049,140 shares issued and outstanding at March 26, 2019; 37,305,342 shares issued and outstanding at January 1, 2019

    4     4
Additional paid-in capital     334,144     336,941
Accumulated other comprehensive income     62     180
Retained earnings     88,486     85,149
Total shareholders' equity     422,696     422,274
Total liabilities and shareholders' equity   $ 953,506   $ 758,956
             
Del Taco Restaurants, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands, except share and per share data)
         
    12 Weeks Ended
    March 26, 2019   March 27, 2018
Revenue:        
Company restaurant sales   $ 105,903     $ 105,109  
Franchise revenue     4,065       3,792  
Franchise advertising contributions     3,131       2,936  
Franchise sublease and other income     1,098       717  
Total revenue     114,197       112,554  
Operating expenses:        
Restaurant operating expenses:        
Food and paper costs     28,818       28,973  
Labor and related expenses     35,900       34,818  
Occupancy and other operating expenses     24,433       21,986  
General and administrative     10,465       10,429  
Franchise advertising expenses     3,131       2,936  
Depreciation and amortization     5,907       5,914  
Occupancy and other - franchise subleases and other     854       638  
Pre-opening costs     100       442  
Restaurant closure charges, net     640       (13 )
Loss on disposal of assets, net     290       93  
Total operating expenses     110,538       106,216  
Income from operations     3,659       6,338  
Other expense, net        
Interest expense     1,784       1,910  
Other income     (104 )      
Total other expense, net     1,680       1,910  
Income from operations before provision for income taxes     1,979       4,428  
Provision for income taxes     554       1,199  
Net income     1,425       3,229  
Other comprehensive (loss) income:        
Change in fair value of interest rate cap, net of tax     (139 )     174  

Reclassification of interest rate cap amortization included in net income, net of tax

    21       6  
Total other comprehensive (loss) income     (118 )     180  
Comprehensive income   $ 1,307     $ 3,409  
Earnings per share:        
Basic   $ 0.04     $ 0.08  
Diluted   $ 0.04     $ 0.08  
Weighted-average shares outstanding        
Basic     37,155,978       38,441,707  
Diluted     37,346,319       39,224,070  
                 
Del Taco Restaurants, Inc.
Reconciliation of Net Income to EBITDA and Adjusted EBITDA
(Unaudited)
(In thousands)
         
    12 Weeks Ended
    March 26, 2019   March 27, 2018
Net income   $ 1,425     $ 3,229  
Non-GAAP adjustments:        
Provision for income taxes     554       1,199  
Interest expense     1,784       1,910  
Depreciation and amortization     5,907       5,914  
EBITDA     9,670       12,252  
Stock-based compensation expense (a)     1,577       1,274  
Loss on disposal of assets, net (b)     290       93  
Restaurant closure charges, net (c)     640       (13 )
Amortization of favorable and unfavorable lease assets and liabilities, net (d)     86       (118 )
Pre-opening costs (e)     100       442  
Other income (f)     (104 )      
Sublease income for closed restaurants (g)     (201 )      
Adjusted EBITDA   $ 12,058     $ 13,930  
                 

(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 gains or losses recorded associated with the sale of company-operated restaurants to franchisees and net gains or losses recorded associated with sale-leaseback transactions.

(c)

 

During 2019, restaurant closure costs includes rent expense, non lease executory costs and other direct costs associated with previously closed restaurants. During 2018, restaurant closure costs 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)

 

Other income consists of insurance proceeds related to a fire at a company-operated restaurant.

(g)

 

Includes other sublease income related to closed restaurants that have been subleased to third parties.

     
Del Taco Restaurants, Inc.
Reconciliation of Company Restaurant Sales to Restaurant Contribution
(Unaudited)
(In thousands)
         
    12 Weeks Ended
    March 26, 2019   March 27, 2018
Company restaurant sales   $ 105,903     $ 105,109  
Restaurant operating expenses     89,151       85,777  
Restaurant contribution   $ 16,752     $ 19,332  
Restaurant contribution margin     15.8 %     18.4 %
                 
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
    March 26, 2019   March 27, 2018
    $   Per Share   $   Per Share
Net income and diluted earnings per share, as reported   $ 1,425     $ 0.04     $ 3,229     $ 0.08
Restaurant closure charges, net (a)     640       0.02       (13 )    
Other income (b)     (104 )                
Sublease income for closed restaurants (c)     (201 )     (0.01 )          
Tax impact of adjustment (d)     (91 )                
Non-GAAP adjusted net income and adjusted diluted earnings per share   $ 1,669     $ 0.04     $ 3,216     $ 0.08
                               

(a)

 

During 2019, restaurant closure costs includes rent expense, non lease executory costs and other direct costs associated with previously closed restaurants. During 2018, restaurant closure costs 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.

(b)

 

Includes other income which consists of insurance proceeds related to a fire at a company-operated restaurant.

(c)

 

Includes other sublease income related to closed restaurants that have been subleased to third parties.

(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
    March 26, 2019   March 27, 2018
Company-operated restaurant activity:        
Beginning of period   322   312
Openings     3
Closures    
Purchased from franchisees   3  
Sold to franchisees   (13)  
Restaurants at end of period   312   315
Franchise-operated restaurant activity:        
Beginning of period   258   252
Openings   4  
Closures   (1)   (1)
Purchased from Company   13  
Sold to Company   (3)  
Restaurants at end of period   271   251
Total restaurant activity:        
Beginning of period   580   564
Openings   4   3
Closures   (1)   (1)
Restaurants at end of period   583   566



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