Del Taco Restaurants, Inc. Reports Fiscal Second Quarter 2019 Financial Results
Reaffirms Guidance for Fiscal Year 2019
Lake Forest, CA. July 29, 2019 - Del Taco Restaurants, Inc. (“Del Taco” or the “Company”), (NASDAQ: TACO), the second largest Mexican-American
quick service restaurant chain by units in the United States, today reported fiscal second quarter 2019 financial results for the 12-week period ending June 18, 2019. Del Taco also reaffirmed its previously announced guidance for fiscal year 2019.
Company-operated
comparable restaurant sales increased 1.7%. Company-operated comparable restaurant sales were comprised of average check growth of 4.2%, including slight menu mix growth, partially offset by a transaction decline of 2.5%;
Total revenue of $121.5 million representing 3.1% growth from the fiscal second quarter 2018;
•
Company-operated
restaurant sales of $112.2 million representing 2.2% growth from the fiscal second quarter 2018;
•
Net income was $2.1 million, or $0.06 per diluted share, compared to $4.2 million, or $0.11 per diluted share, in the fiscal second quarter 2018;
•
Adjusted net income* was $4.9 million, or $0.13 per diluted share, compared to $5.4 million, or $0.14 per diluted share, in the fiscal second quarter 2018;
•
Restaurant
contribution* margin of 19.0%, which includes an approximate 70 basis points unfavorable impact from the adoption of the new lease accounting standard, compared to 19.7% in the fiscal second quarter 2018;
•
Adjusted EBITDA* of $16.7 million, which includes approximately $0.7 million of unfavorable impact from the adoption of the new lease accounting standard, compared to $16.8 million in the fiscal second quarter 2018; and
•
One company-operated restaurant and two franchised restaurant openings and three company-operated restaurant
closures.
* 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, “Del Taco’s digital transformation, value evolution, and menu innovation strategies drove sequential system-wide comparable restaurant sales improvement during the second quarter. Company-operated restaurants experienced a 230 basis point and 300 basis point improvement, respectively, in comparable restaurant sales and transactions relative to the first quarter, while franchised restaurants similarly generated stronger sequential trends. We also
improved our restaurant contribution margin performance compared to the first quarter due to these stronger top-line results coupled with effective cost management. Based upon our second quarter performance and outlook for the remainder of 2019, we are reaffirming our annual guidance.”
Cappasola continued, “The Del App now exceeds 675,000 registered users and we have expanded its functionality in company-operated restaurants to include online ordering through the App for pickup or delivery. Delivery is already available through
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Grubhub in substantially all company-operated restaurants, and we are particularly excited about our plans to add Postmates and DoorDash later this year.”
Cappasola
concluded, “Del Taco’s second quarter product and promotion strategy centered on the $4, $5 and $6 ‘Fresh Faves’ box meals to enhance our value platform, and the Beyond Taco and Beyond Avocado Taco platform to leverage our menu innovation. These products accentuate our QSR plus brand positioning and have been very well received by our guests as ‘Fresh Faves’ mixed at nearly 5% throughout the quarter while the Beyond Tacos mixed at over 6% since their system-wide launch on April 25th. During the third quarter we expanded our Beyond product line to include the Beyond 8 Layer Burrito and the Epic Beyond Cali Burrito as we seek to capitalize on the popularity and versatility of this 100% plant-based protein.”
Review of Fiscal Second Quarter 2019 Financial Results
Total
revenue increased 3.1% to $121.5 million compared to $117.8 million in the fiscal second quarter 2018. Comparable restaurant sales increased 2.2% system-wide, resulting in a 5.5% increase on a two-year basis. Company-operated comparable restaurant sales increased 1.7% while franchise comparable restaurant sales increased 2.8%.
Net income was $2.1 million, representing $0.06 per diluted share, compared to $4.2 million in the fiscal second quarter 2018, representing $0.11 per diluted share.
Adjusted net income* was $4.9 million, or $0.13 per diluted share, compared to $5.4 million in the fiscal second quarter 2018, or $0.14 per diluted share.
Restaurant contribution* was $21.3 million compared to $21.7
million in the fiscal second quarter 2018. As a percentage of Company-operated restaurant sales, restaurant contribution margin decreased 70 basis points year-over-year to 19.0%. The decrease was the result of an approximately 50 basis point increase in occupancy and other operating expenses, an approximately 10 basis point increase in food and paper costs and an approximately 10 basis point increase in labor and related expenses. Restaurant contribution margin included a negative impact of approximately 70 basis points due to the adoption of the new lease accounting standard.
Adjusted EBITDA* was $16.7 million compared to $16.8 million in the fiscal second quarter 2019 and in fiscal 2019 includes approximately $0.7 million of unfavorable impact from the adoption of the new lease accounting standard.
Restaurant
Development
During the fiscal second quarter 2019, there was one company-operated restaurant opening and two franchised restaurant openings. Thus far in 2019 there have been a total of nine system-wide openings and there are currently another 12 restaurants under construction with five more scheduled to begin construction in August. Del Taco also recently signed a new franchise development agreement for seven restaurants in Columbus, Ohio.
Repurchase Program for Common Stock and Warrants
During the fiscal second quarter 2019, the Company repurchased 303,607 shares of common stock at average price of $10.05 per share
and repurchased 6,186 warrants at an average price per warrant of $1.30, for an aggregate of $3.1 million. At the fiscal quarter-end, approximately $22.3 million remained under our $75 million repurchase authorization.
Restaurant Portfolio Optimization
Del Taco continues to focus on optimizing its restaurant portfolio to help stimulate growth in new restaurants and existing restaurant AUV’s. This effort is expected to help shift company ownership to approximately 45% by the summer of 2020. 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 driven significant interest among new and existing franchisees and the Company is currently performing its due diligence by evaluating transaction economics and, most importantly, buyer qualifications including their track record as operators and new unit developers. 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.
2
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.
Adjusted net income, restaurant contribution, and adjusted EBITDA* are non-GAAP measures and defined below under “Key Financial Definitions”.
We
have not reconciled guidance for Adjusted Net Income or Adjusted EBITDA to the corresponding GAAP financial measure because we do not provide guidance for the various reconciling items. We are unable to provide guidance for these reconciling items because we cannot determine their probable significance, as certain items are outside of our control and cannot be reasonably predicted since these items could vary significantly from period to period. Accordingly, a reconciliation to the corresponding GAAP financial measure is not available without unreasonable effort.
Conference Call
A conference call and webcast to discuss Del Taco’s financial results and annual guidance is scheduled for 4:30 p.m. ET today. Hosting the conference call and webcast will be John D. Cappasola, Jr., President and
Chief Executive Officer; and Steven L. Brake, Executive Vice President and Chief Financial Officer.
Interested parties may listen to the conference call via telephone by dialing 201-689-8471. A telephone replay will be available shortly after the call has concluded and can be accessed by dialing 412-317-6671; the passcode is 13692074.
The webcast will be available at www.deltaco.com under the investors section and will be archived on the site shortly after the call
has concluded.
Key Financial Definitions
Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable company, franchise and total system restaurant base. Restaurants are included in the comparable store base in the accounting period following its 18th full month of operations and excludes restaurant closures.
Restaurant contribution* is defined as company restaurant sales less restaurant operating expenses, which are food and paper costs, labor and related expenses and occupancy and other operating expenses. Restaurant contribution
margin is defined as restaurant contribution as a percentage of company restaurant sales. Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of restaurants and the calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of results as reported under U.S. GAAP. Management believes that restaurant contribution and restaurant contribution margin are important tools for investors because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. Management uses
restaurant contribution and restaurant contribution margin as key performance indicators to evaluate the profitability of incremental sales at Del Taco restaurants, to evaluate restaurant performance across periods and to evaluate restaurant financial performance compared with competitors.
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Adjusted EBITDA* is defined as net income/loss prior to interest expense, income taxes, and depreciation and amortization, as adjusted to add back certain charges, such as stock-based compensation expense and restaurant closure charges, as these expenses are not considered an indicator of ongoing company performance. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as an alternative to operating income or net income/loss as a measure of operating
performance or cash flows or as measures of liquidity. Non-GAAP financial measures are not necessarily calculated the same way by different companies and should not be considered a substitute for or superior to GAAP results. We believe Adjusted EBITDA facilitates operating performance comparisons from period to period by 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. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present Adjusted EBITDA because (i) we believe this measure is frequently used by securities analysts, investors and other interested parties to evaluate companies in
our industry and (ii) we use Adjusted EBITDA internally as a benchmark to compare performance to that of competitors.
Adjusted net income* represents company net income before restaurant closure charges, sublease income related to closed restaurants, impairment of long-lived assets and other income related to insurance proceeds, net of tax. Adjusted diluted net income per share* represents company diluted net income per share before restaurant closure charges, sublease income related to closed restaurants, impairment of long-lived assets and other income related to insurance proceeds, net of tax.
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. For more information, visit www.deltaco.com.
Forward-Looking
Statements
In addition to historical information, this release may contain a number of “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, information concerning Del Taco’s possible or assumed future results of operations, business strategies, competitive position, industry environment, potential growth opportunities and the effects of regulation. These statements are based on Del Taco’s management’s current expectations and beliefs, as well as a number of assumptions concerning future events. When used in this press release, the words “estimates,”“projected,”“expects,”“anticipates,”“forecasts,”“plans,”“intends,”“believes,”“seeks,”“target,”“may,”“will,”“should,”“future,”“propose,”“preliminary,”“guidance,”“on track” and variations of these words or similar expressions (or the negative versions of such words or expressions) are intended to identify forward-looking statements. Such forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other important factors, many of which are outside Del Taco’s management’s control that could cause actual results to differ materially from the results discussed in the forward-looking statements. These risks include, without limitation, consumer demand, our inability to successfully open company-operated or franchised restaurants or establish new markets, competition in our markets, our inability to grow and manage growth profitably, adverse changes in food and supply costs, our inability to access additional capital, changes in applicable
laws or regulations, food safety and foodborne illness concerns, our inability to manage existing and to obtain additional franchisees, our inability to attract and retain qualified personnel, our inability to profitably expand into new markets, changes in, or the discontinuation of, the Company’s repurchase program, and the possibility that we may be adversely affected by other economic, business, and/or competitive factors. Additional risks and uncertainties are identified and discussed in Del Taco’s reports filed with the SEC, including under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended January 1, 2019, and available at the SEC’s website at www.sec.gov
and the Company’s website at www.deltaco.com.
Forward-looking statements included in this release speak only as of the date of this release. Del Taco undertakes no obligation to update its forward-looking statements to reflect events or circumstances after the date of this release or otherwise.
Current portion of finance lease obligations, other debt and deemed landlord financing liabilities
423
1,033
Current
portion of operating lease liabilities
19,861
—
Total current liabilities
75,066
55,695
Long-term
debt, finance lease obligations, other debt and deemed landlord financing liabilities, excluding current portion, net
146,587
178,664
Operating lease liabilities, excluding current portion
225,100
—
Deferred
income taxes
69,958
69,471
Other non-current liabilities
15,336
32,852
Total
liabilities
532,047
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; 36,795,532 shares issued and outstanding at June 18, 2019; 37,305,342 shares issued and outstanding at January 1, 2019
Amortization
of favorable and unfavorable lease assets and liabilities, net (d)
(23
)
(132
)
63
(250
)
Pre-opening
costs (e)
155
199
255
641
Impairment of long-lived assets (f)
3,694
1,661
3,694
1,661
Other
income (g)
(97
)
—
(201
)
—
Sublease income for closed restaurants (h)
(180
)
—
(381
)
—
Adjusted
EBITDA
$
16,736
$
16,802
$
28,794
$
30,732
(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)
Includes costs related to impairment of long-lived assets.
(g)
Other income consists of insurance proceeds related to a fire at two company-operated restaurants.
(h)
Includes
other sublease income related to closed restaurants that have been subleased to third parties.
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Del Taco Restaurants, Inc.
Reconciliation of Company Restaurant Sales to Restaurant Contribution
Net income and diluted earnings per share, as reported
$
3,517
$
0.09
$
7,439
$
0.19
Restaurant
closure charges, net (a)
1,130
0.03
(37
)
—
Other income (b)
(201
)
(0.01
)
—
—
Sublease
income for closed restaurants (c)
(381
)
(0.01
)
—
—
Impairment of long-lived
assets (d)
3,694
0.10
1,661
0.04
Tax impact of adjustment (e)
(1,176
)
(0.03
)
(442
)
(0.01
)
Non-GAAP
adjusted net income and adjusted diluted earnings per share
$
6,583
$
0.18
$
8,621
$
0.22
(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 two company-operated restaurants.
(c)
Includes
other sublease income related to closed restaurants that have been subleased to third parties.
(d)
Includes costs related to impairment of long-lived assets.
(e)
Represents the income tax associated with the adjustments in (a) through (d) that are deductible for income tax purposes.
