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

System-wide comparable restaurant sales increased 2.2%

Del Taco Restaurants, Inc., (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.

Fiscal Second Quarter 2019 Highlights

  • System-wide comparable restaurant sales increased 2.2%;
    • 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%;
    • Franchised comparable restaurant sales increased 2.8%;
  • 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.

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 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.

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)
         
    June 18, 2019   January 1, 2019
Assets   (unaudited)    
Current assets:        
Cash and cash equivalents  

$

5,250

 

 

$

7,153

Accounts and other receivables, net  

 

2,269

 

 

 

3,167

Inventories  

 

2,831

 

 

 

2,932

Prepaid expenses and other current assets  

 

2,960

 

 

 

4,935

Assets held for sale    

 

14,794

Total current assets  

 

13,310

 

 

 

32,981

Property and equipment, net  

 

153,498

 

 

 

161,429

Operating lease right-of-use assets  

 

228,763

 

 
Goodwill  

 

324,120

 

 

 

321,531

Trademarks  

 

220,300

 

 

 

220,300

Intangible assets, net  

 

11,370

 

 

 

18,507

Other assets, net  

 

3,994

 

 

 

4,208

Total assets  

$

955,355

 

 

$

758,956

         
Liabilities and shareholders’ equity        
Current liabilities:        
Accounts payable  

$

19,688

 

 

$

19,877

Other accrued liabilities  

 

35,094

 

 

 

34,785

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  

 

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
 

 

4

 

 

 

4

Additional paid-in capital  

 

332,769

 

 

 

336,941

Accumulated other comprehensive (loss) income  

 

(43

)

 

 

180

Retained earnings  

 

90,578

 

 

 

85,149

Total shareholders’ equity  

 

423,308

 

 

 

422,274

Total liabilities and shareholders’ equity  

$

955,355

 

 

$

758,956

         
Del Taco Restaurants, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands, except share and per share data)
                 
    12 Weeks Ended   24 Weeks Ended
    June 18, 2019   June 19, 2018   June 18, 2019   June 19, 2018
Revenue:                
Company restaurant sales  

$

112,180

 

 

$

109,800

 

 

$

218,083

 

 

$

214,909

 

Franchise revenue  

 

4,638

 

 

 

4,149

 

 

 

8,703

 

 

 

7,941

 

Franchise advertising contributions  

 

3,459

 

 

 

3,136

 

 

 

6,590

 

 

 

6,072

 

Franchise sublease and other income  

 

1,183

 

 

 

728

 

 

 

2,281

 

 

 

1,445

 

Total revenue  

 

121,460

 

 

 

117,813

 

 

 

235,657

 

 

 

230,367

 

Operating expenses:                
Restaurant operating expenses:                
Food and paper costs  

 

30,855

 

 

 

30,082

 

 

 

59,673

 

 

 

59,055

 

Labor and related expenses  

 

36,338

 

 

 

35,422

 

 

 

72,238

 

 

 

70,240

 

Occupancy and other operating expenses  

 

23,703

 

 

 

22,627

 

 

 

48,136

 

 

 

44,613

 

General and administrative  

 

10,849

 

 

 

10,321

 

 

 

21,314

 

 

 

20,750

 

Franchise advertising expenses  

 

3,459

 

 

 

3,136

 

 

 

6,590

 

 

 

6,072

 

Depreciation and amortization  

 

5,813

 

 

 

5,847

 

 

 

11,720

 

 

 

11,761

 

Occupancy and other – franchise subleases and other  

 

993

 

 

 

651

 

 

 

1,847

 

 

 

1,289

 

Pre-opening costs  

 

155

 

 

 

199

 

 

 

255

 

 

 

641

 

Impairment of long-lived assets  

 

3,694

 

 

 

1,661

 

 

 

3,694

 

 

 

1,661

 

Restaurant closure charges, net  

 

490

 

 

 

(24

)

 

 

1,130

 

 

 

(37

)

Loss on disposal of assets, net  

 

594

 

 

 

87

 

 

 

884

 

 

 

180

 

Total operating expenses  

 

116,943

 

 

 

110,009

 

 

 

227,481

 

 

 

216,225

 

Income from operations  

 

4,517

 

 

 

7,804

 

 

 

8,176

 

 

 

14,142

 

Other expense, net                
Interest expense  

 

1,722

 

 

 

2,012

 

 

 

3,506

 

 

 

3,922

 

Other income  

 

(97

)

   

 

(201

)

 
Total other expense, net  

 

1,625

 

 

 

2,012

 

 

 

3,305

 

 

 

3,922

 

Income from operations before provision for income taxes  

 

2,892

 

 

 

5,792

 

 

 

4,871

 

 

 

10,220

 

Provision for income taxes  

 

800

 

 

 

1,582

 

 

 

1,354

 

 

 

2,781

 

Net income  

 

2,092

 

 

 

4,210

 

 

 

3,517

 

 

 

7,439

 

Other comprehensive (loss) income:                
Change in fair value of interest rate cap, net of tax  

 

(131

)

 

 

115

 

 

 

(270

)

 

 

289

 

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

 

26

 

 

 

10

 

 

 

47

 

 

 

16

 

Total other comprehensive (loss) income  

 

(105

)

 

 

125

 

 

 

(223

)

 

 

305

 

Comprehensive income  

$

1,987

 

 

$

4,335

 

 

$

3,294

 

 

$

7,744

 

Earnings per share:                
Basic  

$

0.06

 

 

$

0.11

 

 

$

0.10

 

 

$

0.19

 

Diluted  

$

0.06

 

 

$

0.11

 

 

$

0.09

 

 

$

0.19

 

Weighted-average shares outstanding                
Basic  

 

36,821,728

 

 

 

38,299,483

 

 

 

36,988,853

 

 

 

38,370,595

 

Diluted  

 

37,083,799

 

 

 

38,643,873

 

 

 

37,215,059

 

 

 

38,938,106

 

Del Taco Restaurants, Inc.
Reconciliation of Net Income to EBITDA and Adjusted EBITDA
(Unaudited)
(In thousands)
                 
    12 Weeks Ended   24 Weeks Ended
    June 18, 2019   June 19, 2018   June 18, 2019   June 19, 2018
Net income  

$

2,092

 

 

$

4,210

 

 

$

3,517

 

 

$

7,439

 

Non-GAAP adjustments:                
Provision for income taxes  

 

800

 

 

 

1,582

 

 

 

1,354

 

 

 

2,781

 

Interest expense  

 

1,722

 

 

 

2,012

 

 

 

3,506

 

 

 

3,922

 

Depreciation and amortization  

 

5,813

 

 

 

5,847

 

 

 

11,720

 

 

 

11,761

 

EBITDA  

 

10,427

 

 

 

13,651

 

 

 

20,097

 

 

 

25,903

 

Stock-based compensation expense (a)  

 

1,676

 

 

 

1,360

 

 

 

3,253

 

 

 

2,634

 

Loss on disposal of assets, net (b)  

 

594

 

 

 

87

 

 

 

884

 

 

 

180

 

Restaurant closure charges, net (c)  

 

490

 

 

 

(24

)

 

 

1,130

 

 

 

(37

)

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 a company-operated restaurant.
(h) 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   24 Weeks Ended
    June 18, 2019   June 19, 2018   June 18, 2019   June 19, 2018
Company restaurant sales  

$ 112,180

 

$ 109,800

 

$ 218,083

 

$ 214,909

Restaurant operating expenses  

90,896

 

88,131

 

180,047

 

173,908

Restaurant contribution  

$ 21,284

 

$ 21,669

 

$ 38,036

 

$ 41,001

Restaurant contribution margin  

19.0 %

 

19.7 %

 

17.4 %

 

19.1 %

                 
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
    June 18, 2019   June 19, 2018
   

$

  Per Share  

$

  Per Share
Net income and diluted earnings per share, as reported  

$

2,092

 

 

$

0.06

 

 

$

4,210

 

 

$

0.11

 

Restaurant closure charges, net (a)  

 

490

 

 

 

0.01

 

 

 

(24

)

 
Other income (b)  

 

(97

)

     
Sublease income for closed restaurants (c)  

 

(180

)

     
Impairment of long-lived assets (d)  

 

3,694

 

 

 

0.10

 

 

 

1,661

 

 

 

0.04

 

Tax impact of adjustment (e)  

 

(1,085

)

 

 

(0.03

)

 

 

(445

)

 

 

(0.01

)

Non-GAAP adjusted net income and adjusted diluted earnings per share  

$

4,914

 

 

$

0.13

 

 

$

5,402

 

 

$

0.14

 

                 
    24 Weeks Ended   24 Weeks Ended
    June 18, 2019   June 19, 2018
   

$

  Per Share  

$

  Per Share
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, 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   24 Weeks Ended
    June 18, 2019   June 19, 2018   June 18, 2019   June 19, 2018
Company-operated restaurant activity:                
Beginning of period  

312

 

 

315

 

 

322

 

 

312

 

Openings  

1

 

 

1

 

 

1

 

 

4

 

Closures  

(3

)

 

(1

)

 

(3

)

 

(1

)

Purchased from franchisees  

   

3

 

 
Sold to franchisees      

(13

)

 
Restaurants at end of period  

310

 

 

315

 

 

310

 

 

315

 

Franchise-operated restaurant activity:                
Beginning of period  

271

 

 

251

 

 

258

 

 

252

 

Openings  

2

 

 

1

 

 

6

 

 

1

 

Closures    

(1

)

 

(1

)

 

(2

)

Purchased from Company      

13

 

 
Sold to Company      

(3

)

 
Restaurants at end of period  

273

 

 

251

 

 

273

 

 

251

 

Total restaurant activity:                
Beginning of period  

583

 

 

566

 

 

580

 

 

564

 

Openings  

3

 

 

2

 

 

7

 

 

5

 

Closures  

(3

)

 

(2

)

 

(4

)

 

(3

)

Restaurants at end of period  

583

 

 

566

 

 

583

 

 

566