Diversified Restaurant Holdings

Diversified Restaurant Holdings Reports 4.2% Increase in Same-Store Sales for First Quarter 2019

Comparable sales continue to trend positive in the second quarter, up 7.7% before Easter shift and 4.6% after, with both traffic and average ticket up

Diversified Restaurant Holdings

Diversified Restaurant Holdings, Inc. (Nasdaq:SAUC), one of the largest franchisees for Buffalo Wild Wings® ("BWW") with 64 stores across five states, today announced results for its first quarter ended March 31, 2019.

First Quarter Information (compared with prior-year period unless otherwise noted)

  • Revenue totaled $40.6 million, up 2.6% despite one fewer restaurant
  • Same-store sales increased 4.2%
  • Net income was $0.1 million
  • Restaurant-level EBITDA(1) was $6.4 million or 15.7% of sales
  • Adjusted EBITDA(1) was $4.5 million or 11.1% of sales
  • Total debt of $99.5 million was down $3.0 million for the year-to-date period

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

"The increase in our first quarter sales, particularly the strong trend in March that has continued into the second quarter, is an exciting indication of things to come for the BWW brand. Despite headwinds early in the quarter due to severe winter weather hindering sales for two entire football playoff weekends in each of our three core Midwest markets, the quarter was our second consecutive positive result for same-store sales. Our focus on perfecting the execution of the delivery channel continues to pay-off, as delivery led the way for us early in the quarter. However, as the new brand media and product launches began in mid-March, we finally saw our dine-in traffic turn positive. In fact, since those launches, our dine-in same-store sales through the end of last week are up 3.0%," commented David G. Burke, President and CEO.

"While we are disappointed that the revenue increase didn’t convert well to earnings this quarter, we are much more optimistic about the future. Cost of sales, labor and delivery expenses were all headwinds in the quarter as traditional wing prices were higher than expected and labor cost headwinds remain a concern. On the labor front, we made significant investments in training during the quarter around new brand initiatives, and while we don't expect these to be permanent costs, certain of these initiatives will also impact our labor line in the second quarter. Additionally, we implemented a menu price increase at the tail end of the quarter that will help to alleviate these pressures, and we are successfully and meaningfully driving down our delivery costs while continuing to ramp up sales. We have also taken another hard look at our G&A expenses, and will be executing reductions in the next several weeks approaching $1 million on an annualized basis. We expect these reductions to drive overhead expenses below 5% of sales for this year, and closer to 4.5% in future years when we get the full benefit of the reductions."

                                       
First Quarter Results                                      
(Unaudited, $ in thousands)       Q1 2019         Q1 2018         Change         % Change
Revenue       $ 40,568.1           $ 39,533.0           $ 1,035.1           2.6 %
Operating profit       $ 1,537.5           $ 1,471.9           $ 65.6           4.6 %
Operating margin       3.8 %         3.7 %                    
Net Income       $ 55.4           $ 159.9           $ (104.5 )         (65.4 )%
Net income per share       $           $ 0.01           $ (0.01 )         (100.0 )%
                                       
Same-store sales       4.2 %         (8.5 )%                    
                                       
Restaurant-level EBITDA(1)       $ 6,378.9           $ 6,898.1           $ (519.2 )         (7.5 )%
Restaurant-level EBITDA margin       15.7 %         17.4 %                    
Adjusted EBITDA(2)       $ 4,502.2           $ 5,071.7           $ (569.5 )         (11.2 )%
Adjusted EBITDA margin       11.1 %         12.8 %                    
(1)   Please see attached table for a reconciliation of GAAP net income to Restaurant-level EBITDA and Adjusted EBITDA
     

There was a favorable calendar shift in the quarter, as Easter, a holiday on which the DRH restaurants are closed, fell within the 2018 first quarter versus the second quarter in 2019.

General and administrative ("G&A") expenses as a percentage of sales decreased 20 basis points to 5.5% due to lower corporate overhead and other efficiency initiatives, partially offset by higher incentive accruals. For the full year of fiscal 2019, the Company is targeting G&A expenses below 5% of sales, excluding non-recurring items.

Food, beverage, and packaging costs as a percentage of sales increased 60 basis points to 28.8% primarily due to higher traditional chicken wing costs. Average cost per pound for traditional bone-in chicken wings, DRH’s most significant input cost, increased to $1.94 in the 2019 first quarter compared with $1.89 in the prior-year period.

Higher average wages due to a tight labor market and investments in training around new brand initiatives resulted in compensation costs as a percent of sales increasing 120 basis points to 26.9%.

Balance Sheet Highlights

Cash and cash equivalents were $6.5 million at March 31, 2019, compared with $5.4 million at the end of 2018. Capital expenditures were $0.6 million during the first three months of 2019 and were for minor facility upgrades and general maintenance-type investments, but also included approximately $0.2 million invested in the plate ware upgrades introduced in March. DRH does not expect to build any new restaurants or complete any major remodels in 2019. As a result, the Company anticipates its capital expenditures will approximate $2.0 million in fiscal 2019.

Total debt was $99.5 million at the end of the quarter, down $3.0 million since 2018 year-end.

Mr. Burke added, "We are focused on refinancing our debt between now and the end of the third quarter. While the fact that BWW exercised its right of first refusal on our planned acquisition caused us to change course on this refinancing, we are highly confident about a successful outcome in the next several months. We expect that, after refinance, the debt service demands on our free cash flow will be substantially lessened, supporting our ability to invest in the business to drive improved financial performance and shareholder value."

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
          March 31, 2019         April 1, 2018
Revenue         $ 40,568,084           $ 39,532,957  
                     
Operating expenses                    

Restaurant operating costs (exclusive of depreciation

and amortization shown separately below):

                   
Food, beverage, and packaging costs         11,684,395           11,132,377  
Compensation costs         10,906,293           10,164,655  
Occupancy costs         2,938,054           2,943,840  
Other operating costs         8,688,161           8,393,955  
General and administrative expenses         2,239,947           2,253,928  
Depreciation and amortization         2,565,370           3,166,500  
Loss on asset disposal         8,385           5,851  
Total operating expenses         39,030,605           38,061,106  
                     
Operating profit         1,537,479           1,471,851  
                     
Interest expense         (1,505,335 )         (1,646,044 )
Other income, net         40,054           32,640  
Income (loss) before income taxes         72,198           (141,553 )
                     
Income tax benefit (expense)         (16,757 )         301,423  
Net Income         $ 55,441           $ 159,870  
                     
Basic and diluted earnings per share         $           $ 0.01  
                     
Weighted average number of common shares outstanding:                    
Basic and diluted         31,925,521           26,853,724  

As a result of the Company’s adoption of the new lease standard (ASU 2016-02), certain prior year amounts have been reclassified for consistency with the current year presentation.

                     

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

                     
ASSETS        

March 31,

2019

       

December 30,

2018

Current assets:                    
Cash and cash equivalents         $ 6,506,938           $ 5,364,014  
Accounts receivable         328,914           654,322  
Inventory         1,505,609           1,526,779  
Prepaid and other assets         391,621           556,480  
Total current assets         8,733,082           8,101,595  
                     
Property and equipment, net         32,458,202           34,423,345  
Operating lease right-of-use assets         51,096,209           52,650,512  
Intangible assets, net         2,173,074           2,198,685  
Goodwill         50,097,081           50,097,081  
Other long-term assets         289,046           408,761  
Total assets         $ 144,846,694           $ 147,879,979  
                     
LIABILITIES AND STOCKHOLDERS' DEFICIT                    
Current liabilities:                    
Accounts payable         $ 4,338,999           $ 4,273,133  
Accrued compensation         2,802,803           1,830,415  
Other accrued liabilities         3,235,999           2,821,235  
Current portion of long-term debt         11,494,830           11,515,093  
Current portion of operating lease liabilities         6,190,122           6,670,227  
Total current liabilities         28,062,753           27,110,103  
                     
Operating lease liabilities, less current portion         47,897,014           48,956,491  
Deferred income taxes         1,177,039           1,220,087  
Unfavorable operating leases         415,881           438,944  
Other long-term liabilities         321,454           343,075  
Long-term debt, less current portion         88,027,975           90,907,537  
Total liabilities         165,902,116           168,976,237  
                     
Stockholders’ deficit:                    

Common stock - $0.0001 par value; 100,000,000 shares authorized;

33,215,584 and 33,200,708, respectively, issued and outstanding

        3,188           3,182  

Preferred stock - $0.0001 par value; 10,000,000 shares authorized;

zero shares issued and outstanding

                   
Additional paid-in capital         27,192,077           27,021,517  
Accumulated other comprehensive income         114,338           355,293  
Accumulated deficit         (48,365,025 )         (48,476,250 )
Total stockholders’ deficit         (21,055,422 )         (21,096,258 )
                     
Total liabilities and stockholders’ deficit         $ 144,846,694           $ 147,879,979  

As a result of the Company’s adoption of the new lease standard (ASU 2016-02), certain prior year amounts have been reclassified for consistency with the current year presentation.

           

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

           
          Three Months Ended
          March 31, 2019         April 1, 2018
Cash flows from operating activities                    
Net income         $ 55,441           $ 159,870  

Adjustments to reconcile net income to net cash provided by

operating activities:

                   
Depreciation and amortization         2,542,307           3,166,500  
Amortization of operating lease assets         1,554,303           1,582,406  
Amortization of debt discount and loan fees         64,080           72,434  
Loss on asset disposals         8,385           5,851  
Share-based compensation         168,338           234,758  
Deferred income taxes         6,175           (301,423 )

Changes in operating assets and liabilities that

provided (used) cash:

                   
Accounts receivable         325,408           358,167  
Inventory         21,171           (2,937 )
Prepaid and other assets         107,230           (38,763 )
Intangible assets                   (20,076 )
Other long-term assets         (57,050 )          
Accounts payable         85,155           (1,325,034 )
Operating lease liabilities         (1,539,582 )         (1,581,449 )
Accrued liabilities         1,365,530           1,187,397  
Net cash provided by operating activities         4,706,891           3,497,701  
                     
Cash flows from investing activities                    
Purchases of property and equipment         (602,290 )         (496,061 )
Net cash used in investing activities         (602,290 )         (496,061 )
                     
Cash flows from financing activities                    
Proceeds from issuance of long-term debt                    
Repayments of long-term debt         (2,963,905 )         (2,879,156 )
Proceeds from employee stock purchase plan         28,137           18,974  
Tax withholdings for restricted stock         (25,909 )         (43,617 )
Net cash used in financing activities         (2,961,677 )         (2,903,799 )
                     
Net increase in cash and cash equivalents         1,142,924           97,841  
                     
Cash and cash equivalents, beginning of period         5,364,014           4,371,156  
                     
Cash and cash equivalents, end of period         $ 6,506,938           $ 4,468,997  

As a result of the Company’s adoption of the new lease standard (ASU 2016-02), certain prior year amounts have been reclassified for consistency with the current year presentation.

 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
Reconciliation between Net Income and Adjusted EBITDA and Adjusted Restaurant-Level EBITDA
 
        Three Months Ended (Unaudited)
        March 31, 2019         April 1, 2018
Net Income       $ 55,441           $ 159,870  
+ Income tax (benefit) expense       16,757           (301,423 )
+ Interest expense       1,505,335           1,646,044  
+ Other income, net       (40,054 )         (32,640 )
+ Loss on asset disposal       8,385           5,851  
+ Depreciation and amortization       2,565,370           3,166,500  
EBITDA       $ 4,111,234           $ 4,644,202  
+ Non-recurring expenses (Restaurant-level)       27,671            
+ Non-recurring expenses (Corporate-level)       363,299           427,525  
Adjusted EBITDA       $ 4,502,204           $ 5,071,727  
Adjusted EBITDA margin (%)       11.1 %         12.8 %
+ General and administrative       2,239,947           2,253,928  
+ Non-recurring expenses (Corporate-level)       (363,299 )         (427,525 )
Restaurant–Level EBITDA       $ 6,378,852           $ 6,898,130  
Restaurant–Level EBITDA margin (%)       15.7 %         17.4 %

As a result of the Company’s adoption of the new lease standard (ASU 2016-02), certain prior year amounts have been reclassified for consistency with the current year presentation.



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