Diversified Restaurant Holdings Results

Diversified Restaurant Holdings Reports First Quarter 2018 Results

Revenue totaled $39.5 million; Same-store sales declined 8.5%

Diversified Restaurant Holdings

Diversified Restaurant Holdings, Inc. (NASDAQ:SAUC), one of the largest franchisees for Buffalo Wild Wings with 65 stores across five states, today announced results for its first quarter ended April 1, 2018.

First Quarter Information (from continuing operations)

  • Revenue totaled $39.5 million; Same-store sales declined 8.5%
  • Net income was $0.2 million, or $0.01 per diluted share
  • Restaurant-level EBITDA(1) was $6.9 million, or 17.4% of sales
  • Adjusted EBITDA(1) was $5.1 million
  • Total debt was reduced by $2.9 million to $111.1 million at quarter end

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

“It was a challenging quarter with difficult weather, calendar shifts and promotional changes. However, new ownership at Buffalo Wild Wings is working to create a renewed energy and excitement around the brand. We are seeing progress behind the scenes on many fronts including marketing, advertising, information technology, menu and more. We expect that these efforts will begin to be realized in our results later in the year as the changes are implemented and gain traction. Our first quarter results do not have that benefit and are more reflective of the corporate promotional, marketing and media strategies carried over from the latter half of 2017,” commented David G. Burke, President and CEO. “There are a number of initiatives currently being tested and evaluated that give us confidence, and early indications and feedback have been positive. We just need to be patient and allow the efforts to take hold.”

Mr. Burke added, “Over the past 18 months, in addition to our efforts focused on driving high level customer satisfaction and improving the top line, we have implemented significant, sustainable reductions of overhead to improve our profitability and financial strength. With a new and improved media strategy roll-out planned for this fall in concert with additional traction from other initiatives, we anticipate achieving higher average unit volumes in the future. And, importantly, we expect to see measurable leverage from our leaner and more efficient organization along with the improved commodity cost environment.”

 
First Quarter Results (from continuing operations)
 
(Unaudited, $ in thousands)   Q1 2018   Q1 2017   Change   % Change
Revenue

$ 39,533.0

$ 44,338.0

$ (4,805.0 )

(10.8 )%
Operating income

$ 1,503.8

$ 2,366.6

$ (862.8 )

(36.4 )%
Operating margin

3.8 %

5.3 %

Net income

$ 191.8  

$ 795.6  

$ (603.8 )

(75.9 )%
Diluted net income per share

$ 0.01  

$ 0.03  

$ (0.02 )

(66.7 )%

 
Same-store sales

(8.5 )%

(0.3 )%

 
Restaurant-level EBITDA(1)

$ 6,898.1

$ 8,424.6

$ (1,526.5 )

(18.1 )%
Restaurant-level EBITDA margin

17.4 %

19.0 %

Adjusted EBITDA(1)

$ 5,103.7

$ 6,157.7

$ (1,054.0 )

(17.1 )%
Adjusted EBITDA margin

12.9 %

13.9 %

 

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

There were significant unfavorable calendar shifts in the quarter, as Easter, a holiday on which each of the DRH restaurants is closed, fell within the 2018 first quarter versus the second quarter in 2017. This shift added an additional 1.0% to our same-store sales decline in the quarter. Additionally, the week between Christmas and New Year's Day, a significant sales week given the sports calendar, fell into the first quarter of 2017 but not in the first quarter of 2018 as a result of the 53rd week in fiscal 2017.

Balance Sheet Highlights - Continuing Operations

Cash and cash equivalents were $4.5 million at April 1, 2018, compared with $4.4 million at 2017 year-end. Capital expenditures were $0.5 million during the first three 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. 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 expenses will approximate $1.5 million or less in fiscal 2018.

Total debt was $111.1 million at the end of the quarter, down $2.9 million since 2017 year-end.

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.

FINANCIAL TABLES FOLLOW

 

DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

  Three Months Ended

April 1, 2018   March 26, 2017
Revenue

$ 39,532,957

$ 44,337,964

 
Operating expenses

Restaurant operating costs (exclusive of depreciation and amortization shown separately below):

Food, beverage, and packaging costs

11,132,377

13,038,426

Compensation costs

10,164,655

10,965,530

Occupancy costs

2,943,840

2,893,852

Other operating costs

8,393,955

9,029,876

General and administrative expenses

2,221,969

2,356,966

Pre-opening costs

31,370

Depreciation and amortization

3,166,500

3,633,254

Loss on asset disposal

5,851  

22,059  
Total operating expenses

38,029,147

41,971,333

 
Operating profit

1,503,810

2,366,631

 
Interest expense

(1,646,044 )

(1,575,954 )
Other income, net

32,640  

27,167  

 
Income (loss) from continuing operations before income taxes

(109,594 )

817,844

Income tax benefit (expense) of continuing operations

301,423  

(22,264 )
Income from continuing operations

191,829

795,580

 
Discontinued operations

Income from discontinued operations before income taxes

36,535

Income tax expense of discontinued operations

 

(995 )
Income from discontinued operations

35,540

 
Net income

$ 191,829  

$ 831,120  

 
Basic earnings per share from:

Continuing operations

$ 0.01

$ 0.03

Discontinued operations

$

$

Basic net earnings per share

$ 0.01

$ 0.03

 
Diluted earnings per share from:

Continuing operations

$ 0.01

$ 0.03

Discontinued operations

$

$

Diluted net earnings per share

$ 0.01

$ 0.03

 
Weighted average number of common shares outstanding

Basic

26,853,724

26,629,974

Diluted

26,853,724

26,629,974

 
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
 
ASSETS  

April 1, 2018

(UNAUDITED)

 

December 31,

2017

Current assets

Cash and cash equivalents

$ 4,468,997

$ 4,371,156

Accounts receivable

294,935

653,102

Inventory

1,594,300

1,591,363

Prepaid and other assets

445,444  

408,982  
Total current assets

6,803,676

7,024,603

 
Deferred income taxes

Property and equipment, net

45,314,523

48,014,043

Intangible assets, net

2,391,470

2,438,187

Goodwill

50,097,081

50,097,081

Other long-term assets

487,574  

185,322  
Total assets

$ 105,094,324  

$ 107,759,236  

 
LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities

Accounts payable

$ 3,188,283

$ 4,561,939

Accrued compensation

2,588,593

1,854,127

Other accrued liabilities

2,871,373

2,404,942

Current portion of long-term debt

11,505,571

11,440,433

Current portion of deferred rent

413,049  

411,660  
Total current liabilities

20,566,869

20,673,101

 
Deferred rent, less current portion

2,205,505

2,208,238

Deferred income taxes

2,481,462

2,759,870

Unfavorable operating leases

490,865

510,941

Other long-term liabilities

1,872,428

2,346,991

Long-term debt, less current portion

99,595,544  

102,488,730  
Total liabilities

127,212,673

130,987,871

 
Commitments and contingencies (Notes 3, 10 and 11)

 
Stockholders' deficit

Common stock - $0.0001 par value; 100,000,000 shares authorized; 27,136,514 and 26,859,125, respectively, issued and outstanding

2,643

2,625

Additional paid-in capital

21,986,499

21,776,402

Accumulated other comprehensive income (loss)

425,134

(283,208 )
Accumulated deficit

(44,532,625 )

(44,724,454 )
Total stockholders' deficit

(22,118,349

)

(23,228,635 )

 

 
Total liabilities and stockholders' deficit

$ 105,094,324  

$ 107,759,236  

 
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 

  Three Months Ended

April 1, 2018   March 26, 2017
Cash flows from operating activities

Net income

$ 191,829

$ 831,120

Net income from discontinued operations

 

35,540  
Net income from continuing operations

191,829

795,580

Adjustments to reconcile net income to net cash provided by operating activities

Depreciation and amortization

3,166,500

3,633,254

Amortization of debt discount and loan fees

72,434

52,443

Amortization of gain on sale-leaseback

(31,959 )

(34,794 )
Loss on asset disposals

5,851

22,059

Share-based compensation

234,758

123,082

Deferred income taxes

(301,423 )

23,259

Changes in operating assets and liabilities that provided (used) cash

Accounts receivable

358,167

187,782

Inventory

(2,937 )

69,039

Prepaid and other assets

(36,462 )

313,204

Intangible assets

(20,076 )

(18,915 )
Other long-term assets

429,104

2,084

Accounts payable

(1,325,034 )

(208,157 )
Accrued liabilities

758,293

(577,438 )
Deferred rent

(1,344 )

23,353  
Net cash provided by operating activities of continuing operations

3,497,701  

4,405,835  
Net cash provided by operating activities of discontinued operations

 

35,540  
Net cash provided by operating activities

3,497,701  

4,441,375  

 
Cash flows from investing activities

Purchases of property and equipment

(496,061 )

(1,430,201 )
Net cash used in investing activities

(496,061 )

(1,430,201 )

 
Cash flows from financing activities

Proceeds from issuance of long-term debt

1,217,621

Repayments of long-term debt

(2,879,156 )

(2,879,156 )
Proceeds from employee stock purchase plan

18,974

11,498

Tax withholdings for restricted stock units

(43,617 )

Net cash used in financing activities

(2,903,799 )

(1,650,037 )

 
Net increase in cash and cash equivalents

97,841

1,361,137

 

 
Cash and cash equivalents, beginning of period

4,371,156  

4,021,126  

 

 
Cash and cash equivalents, end of period

$ 4,468,997  

$ 5,382,263  

 
 
DIVERSIFIED RESTAURANT HOLDINGS, INC. AND SUBSIDIARIES
Reconciliation between Net Income and Adjusted EBITDA and Adjusted Restaurant-Level EBITDA
 

Three Months Ended (Unaudited)
  April 1, 2018 March 26, 2017
Net Income $ 191,829     $ 831,120  
+ Loss from discontinued operations

(35,540 )
+ Income tax expense (benefit) (301,423 )

22,264

+ Interest expense 1,646,044

1,575,954

+ Other income, net (32,640 )

(27,167 )
+ Loss on asset disposal 5,851

22,059

+ Depreciation and appreciation 3,166,500     3,633,254  
EBITDA $ 4,676,161     $ 6,021,944  
+ Pre-opening costs

31,370

+ Non-recurring expenses (Restaurant-level)

14,300

+ Non-recurring expenses (Corporate-level) 427,525     90,097  
Adjusted EBITDA $ 5,103,686     $ 6,157,711  
Adjusted EBITDA margin (%) 12.9 %

13.9 %
+ General and administrative 2,221,969

2,356,966

+ Non-recurring expenses (Corporate-level) (427,525 )   (90,097 )
Restaurant–Level EBITDA $ 6,898,130     $ 8,424,580  
Restaurant–Level EBITDA margin (%) 17.4 %

19.0 %



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