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Press Release Details

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

05/07/2019

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

SOUTHFIELD, Mich.--(BUSINESS WIRE)-- Diversified Restaurant Holdings, Inc. (Nasdaq:SAUC) ("DRH" or the "Company"), 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."

Webcast, Conference Call and Presentation

DRH will host a conference call and live webcast on Wednesday, May 8, 2019 at 10:00 A.M. Eastern Time, during which management will review the financial and operating results for the first quarter, and discuss its corporate strategies and outlook. A question-and-answer session will follow.

The teleconference can be accessed by calling (201) 389-0879. The webcast can be monitored at www.diversifiedrestaurantholdings.com. A presentation that will be referenced during the conference call is also available on the website.

A telephonic replay will be available from 1:00 P.M. ET on the day of the call through Wednesday,

May 15, 2019. To listen to the archived call, dial (412) 317-6671 and enter replay pin number 13689832, or access the webcast replay at http://www.diversifiedrestaurantholdings.com, where a transcript will also be posted once available.

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. The Company routinely posts news and other important information on its website at http://www.diversifiedrestaurantholdings.com.

Safe Harbor Statement

The information made available in this news release and the Company’s May 8, 2019 earnings conference call contain forward-looking statements which reflect DRH's current view of future events, results of operations, cash flows, performance, business prospects and opportunities. Wherever used, the words "anticipate," "believe," "expect," "intend," "plan," "project," "will continue," "will likely result," "may," and similar expressions identify forward-looking statements as such term is defined in the Securities Exchange Act of 1934. Any such forward-looking statements are subject to risks and uncertainties, actual growth, results of operations, financial condition, cash flows, performance, business prospects and opportunities could differ materially from historical results or current expectations. Some of these risks include, without limitation, the franchisor waiving its right of first refusal, our ability to obtain financing for the acquisition, the success of initiatives aimed at improving the Buffalo Wild Wings brand, the impact of economic and industry conditions, competition, food safety issues, store expansion and remodeling, labor relations issues, costs of providing employee benefits, regulatory matters, legal and administrative proceedings, information technology, security, severe weather, natural disasters, accounting matters, other risk factors relating to business or industry and other risks detailed from time to time in the Securities and Exchange Commission filings of DRH. Forward-looking statements contained herein speak only as of the date made and, thus, DRH undertakes no obligation to update or publicly announce the revision of any of the forward-looking statements contained herein to reflect new information, future events, developments or changed circumstances or for any other reason.

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.

Restaurant-Level EBITDA represents net income plus the sum of non-restaurant specific general and administrative expenses, loss on property and equipment disposals, depreciation and amortization, other income and expenses, interest, taxes, and non-recurring expenses. Adjusted EBITDA represents net income plus the sum of 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, 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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Investor and Media Contact:
Deborah K. Pawlowski
Kei Advisors LLC
716.843.3908
dpawlowski@keiadvisors.com

Source: Diversified Restaurant Holdings, Inc.