Quarterly Report


Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 10-Q

_______________________

(Mark One)



 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 21, 2017

OR



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-35611

 

Del Frisco’s Restaurant Group, Inc.

(Exact name of registrant as specified in its charter)



 





 

 



 

 

Delaware

 

20-8453116

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)



 

920 S. Kimball Ave., Suite 100,

Southlake, TX

 

76092

(Address of principal executive offices)

 

(Zip code)



(817) 601-3421

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company , or an emerging growth company . See definitions of “large accelerated filer , ” “accelerated filer , ” “smaller reporting company , and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 



 

 

 

 

 

 



 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 



 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 



 

 

 

 

Emerging growth company

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with   any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Act.    Yes       No  

As of April 2 4 , 201 7 , the lates t practicable date,   2 1,8 24,326   shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.



1


 

Table of Contents

 



Table of Contents :

 



 

 

 

 



 

 

 

 

 Part I – Financial Information

  

 

3

  

 Item 1. Financial Statements (Unaudited)

  

 

3

  

 Condensed Consolidated Balance Sheets

  

 

3

  

 Condensed Consolidated Statements of Income   and Comprehensive Income

  

 

4

  

 Condensed Consolidated Statement of Changes in Stockholders’ Equity

  

 

5

  

 Condensed Consolidated Statements of Cash Flows

  

 

6

  

 Notes to Condensed Consolidated Financial Statements

  

 

7

  

 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

 

14

  

 Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

 

19

  

 Item 4. Controls and Procedures

  

 

20

  



 

 Part II – Other Information

  

 

20

  

 Item 1. Legal Proceedings

  

 

20

  

 Item 1A. Risk Factors

  

 

20

  

 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  

 

20

  

 Item 3. Defaults Upon Senior Securities

  

 

20

  

 Item 4. Mine Safety Disclosures

  

 

20

  

 Item 5. Other Information

  

 

21

  

 Item 6. Exhibits

  

 

21

  



 

 Signatures

  

 

22

  





2


 

Table of Contents

 

PART I

FINANCIAL INFORMATION



  Item 1.

Financial Statements

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets—Unaudited

(Dollars in thousands, except per share data)





 

 

 

 

 





March 21,

 

December 27,



2017

 

2016



 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

8,727 

 

$

14,622 

Inventory

 

15,741 

 

 

16,400 

Income taxes receivable

 

1,424 

 

 

3,599 

Prepaid expenses and other assets

 

12,978 

 

 

12,059 

Total current assets

 

38,870 

 

 

46,680 

Property and equipment, net of accumulated depreciation of $92,930 and $88,190 at March 21, 2017 and December 27, 2016, respectively

 

202,979 

 

 

195,992 

Goodwill

 

75,365 

 

 

75,365 

Intangible assets, net

 

37,386 

 

 

37,409 

Other assets

 

15,759 

 

 

15,336 

Total assets

$

370,359 

 

$

370,782 



 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

13,012 

 

$

12,791 

Deferred revenue

 

15,748 

 

 

18,735 

Other current liabilities

 

19,442 

 

 

19,550 

Total current liabilities

 

48,202 

 

 

51,076 

Long-term debt

 

22,000 

 

 

 —

Deferred rent obligations

 

41,839 

 

 

37,697 

Deferred income taxes

 

17,320 

 

 

18,189 

Other liabilities

 

15,818 

 

 

17,454 

Total liabilities

 

145,179 

 

 

124,416 

Commitments and contingencies

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding at March 21, 2017 or December 27, 2016

 

 

 

Common stock, $0.001 par value, 190,000,000 shares authorized, 24,271,703 shares issued and 21,826,476 shares outstanding at March 21, 2017 and 24,234,909 shares issued and 23,272,274 shares outstanding at December 27, 2016

 

24 

 

 

24 

Treasury stock at cost: 2,445,227 and 962,635 shares at March 21, 2017 and December 27, 2016, respectively

 

(42,920)

 

 

(17,823)

Additional paid in capital

 

143,926 

 

 

143,325 

Retained earnings

 

124,150 

 

 

120,840 

Total stockholders' equity

 

225,180 

 

 

246,366 

Total liabilities and stockholders' equity

$

370,359 

 

$

370,782 





See notes to condensed consolidated financial statements.

3


 

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income   and Comprehensive Income—Unaudited

(Dollars in thousands, except per share data)







 

 

 

 

 



 

 

 

 

 



12 Weeks Ended



March 21,

 

March 22,



2017

 

2016

Revenues

$

83,890 

 

$

81,194 

Costs and expenses:

 

 

 

 

 

Costs of sales

 

23,781 

 

 

23,218 

Restaurant operating expenses

 

40,851 

 

 

38,626 

Marketing and advertising costs

 

1,300 

 

 

1,321 

Pre-opening costs

 

389 

 

 

94 

General and administrative costs

 

6,311 

 

 

5,750 

Consulting project costs

 

2,036 

 

 

 —

Lease termination and closing costs

 

(2)

 

 

21 

Depreciation and amortization

 

4,816 

 

 

4,285 

Operating income

 

4,408 

 

 

7,879 

Other income (expense), net:

 

 

 

 

 

Interest, net of capitalized interest

 

(10)

 

 

(31)

Other  

 

(2)

 

 

 —

Income before income taxes

 

4,396 

 

 

7,848 

Income tax expense

 

1,086 

 

 

2,437 

Net income

$

3,310 

 

$

5,411 



 

 

 

 

 

Basic earnings per common share

$

0.14 

 

$

0.23 

Diluted earnings per common share

$

0.14 

 

$

0.23 



 

 

 

 

 

Shares used in computing earnings per common share:

 

 

 

 

 

Basic

 

23,059,363 

 

 

23,315,077 

Diluted

 

23,276,542 

 

 

23,398,115 



 

 

 

 

 

Comprehensive income

$

3,310 

 

$

5,411 



See notes to condensed consolidated financial statements.



4


 



DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Stockholders’ Equity —Unaudited

(Dollars in thousands)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Common Stock

 

Additional Paid

 

Treasury

 

Retained

 

 

 



Shares

 

Par Value

 

In Capital

 

Stock

 

Earnings

 

Total 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 27, 2016

23,272,274 

 

$

24 

 

$

143,325 

 

$

(17,823)

 

$

120,840 

 

$

246,366 

Net income

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,310 

 

 

3,310 

Share-based compensation costs

 —

 

 

 —

 

 

533 

 

 

 —

 

 

 —

 

 

533 

Stock option exercises

30,100 

 

 

 —

 

 

68 

 

 

 —

 

 

 —

 

 

68 

Shares issued under stock compensation plan, net of shares withheld for tax effects

6,694 

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Treasury stock purchases

(1,482,592)

 

 

 —

 

 

 —

 

 

(25,097)

 

 

 —

 

 

(25,097)

Balance at March 21, 2017

21,826,476 

 

$

24 

 

$

143,926 

 

$

(42,920)

 

$

124,150 

 

$

225,180 



See notes to condensed consolidated financial statements.



5


 



DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows—Unaudited

(Dollars in thousands)







 

 

 

 

 



 

 

 

 

 



12 Weeks Ended



March 21,

 

March 22,



2017

 

2016

Cash flows from operating activities:

 

 

 

 

 

Net income

$

3,310 

 

$

5,411 

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

 

 

 

 

 

Depreciation and amortization

 

4,816 

 

 

4,285 

Loss on disposal of restaurant property

 

 

 

 —

Loan cost amortization

 

 

 

 —

Equity based compensation

 

533 

 

 

653 

Deferred income taxes

 

(869)

 

 

(413)

Amortization of deferred lease incentives

 

(742)

 

 

(253)

Changes in operating assets and liabilities:

 

 

 

 

 

Inventory

 

659 

 

 

545 

Prepaid expenses and other assets

 

3,190 

 

 

1,483 

Accounts payable

 

402 

 

 

(4,525)

Income taxes

 

2,175 

 

 

1,973 

Deferred rent obligations

 

386 

 

 

(1,716)

Deferred revenue

 

(2,987)

 

 

(2,713)

Other liabilities

 

(1,802)

 

 

535 

Net cash provided by operating activities

 

9,079 

 

 

5,265 



 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(11,966)

 

 

(4,035)

Other investing activities

 

21 

 

 

Net cash used in investing activities

 

(11,945)

 

 

(4,028)



 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from long-term debt

 

22,000 

 

 

 —

Net payments of credit facility

 

 —

 

 

(4,500)

Purchases of treasury stock

 

(25,097)

 

 

 —

Proceeds from exercise of stock options

 

68 

 

 

140 

Net cash used in financing activities

 

(3,029)

 

 

(4,360)



 

 

 

 

 

Net change in cash and cash equivalents

 

(5,895)

 

 

(3,123)

Cash and cash equivalents at beginning of period

 

14,622 

 

 

5,176 

Cash and cash equivalents at end of period

$

8,727 

 

$

2,053 



 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

$

16 

 

$

31 

Income taxes

$

115 

 

$

911 

Non cash investing and financing activities:

 

 

 

 

 

Capital expenditures included in accounts payable at end of period

$

787 

 

$

730 



See notes to condensed consolidated financial statements.

6


 

DEL FRISCO’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements—Unaudited





1.

BUSINESS AND BASIS OF PRESENTATION

As of March 21, 2017 , Del Frisco’s Restaurant Group, Inc. (the “Company”) owned and operated 53 restaurants under the concept names of Del Frisco’s Double Eagle Steak House (“Del Frisco’s”), Sullivan’s Steakhouse (“Sullivan’s”), and Del Frisco’s Grille (“Grille”). Of the 53 restaurants the Company operated at the end of the period covered by this report, there were 12 Del Frisco’s restaurants, 18 Sullivan’s restaurants and 23 Grille restaurants in operation in 24  states and the District of Columbia .

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. Operating results for the 12 weeks ended March 21, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 26, 2017 . In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2016 filed with the SEC on February 28, 2017 (the “ 2016 10-K”).

The Company operates on a 52- or 53-week fiscal year ending the last Tuesday in December. The fiscal quarters ended March 21, 2017 and March 22, 2016 each contained 12 weeks and are referred to herein as the first quarter of fiscal 2017 and the first quarter of fiscal 2016 , respectively. Fiscal 2017 will be a 52-week fiscal year as was fiscal 2016 .

Accounting Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual amounts may differ from those estimates.

There have been no material changes to the significant accounting policies from what was previously reported in the 2016 10-K.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers which will supersede Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition. In August 2015, the FASB deferred the effective date of this new standard by one year. The FASB later issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations, in March 2016, ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, in April 2016, ASU 2016-12, Revenue from Contracts with Customers (Topic 606) – Narrow-Scope Improvements and Practical Expedients, in May 2016, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, in December 2016, all of which further clarified aspects of Topic 606. A core principle of the new guidance is that an entity should measure revenue in connection with its sale of goods and services to a customer based on an amount that depicts the consideration to which the entity expects to be entitled in exchange for each of those goods and services. For a contract that involves more than one performance obligation, the entity must (a) determine or, if necessary, estimate the standalone selling price at inception of the contract for the distinct goods or services underlying each performance obligation and (b) allocate the transaction price to each performance obligation on the basis of the relative standalone selling prices. In addition, under the new guidance, an entity should recognize revenue when (or as) it satisfies each performance obligation under the contract by transferring the promised good or service to the customer. A good or service is deemed transferred when (or as) the customer obtains control of that good or service. The new standard permits the use of either the retrospective or cumulative effect transition method. For public companies, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early application is permitted, but no earlier than fiscal years beginning after December 16, 2016. While we have not yet selected a transition method nor determined the effect of the new standard on our consolidated financial statements, through our assessment of these ASUs, we have identified that the primary items affected by these ASUs are our loyalty program liability and the breakage income associated with our gift card program.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. ASU 2016-02 will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently assessing the potential impact of ASU 2016-02 on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting. The FASB issued this ASU as part of its Simplification Initiative. The amendments in this ASU affect

7


 

all entities that issue share-based payment awards to their employees. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liability and classification on the statement of cash flows. Specifically, all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income tax cash flows as an operating activity. An entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The threshold to qualify for equity classifications permits withholding up to the maximum statutory tax rates in the applicable jurisdiction. Cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. For public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. Under ASU 2016-09, to the extent that the related compensation ultimately recognized for tax purposes exceeds the book expense, a permanent benefit will be recorded to income tax expense and through the rate for the excess benefit. Where the tax expense recognized is less than book, the shortfall is charged to income tax expense. Under the new guidance, entities can estimate forfeitures or recognize forfeitures when they occur. We have historically estimated forfeitures at the grant date and trued them up when vesting events occur. In addition, the simplification of ASU 2016-09 allows the Company to withhold an amount up to the employees’ maximum individual tax rate in the relevant jurisdiction. We adopted ASU 2016-09 on December 28, 2016, and the impact on our consolidated financial statements was immaterial for the first quarter of 2017 .

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments. This ASU is intended to clarify the presentation of cash receipts and payments in specific situations. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and early application is permitted. We currently assessing the impact of this ASU on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which removes the second step of the goodwill impairment test and requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying value exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, and early application is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently assessing the impact of the adoption of this ASU on our consolidated financial statements.



 



 

 



8


 



 

2.

EARNINGS PER SHARE



Basic earnings per share (“EPS”) data is computed based on the weighted average number of shares of common stock outstanding during the period s . Diluted EPS data is computed based on the weighted average number of shares of common stock outstanding, including all potentially issuable shares of common stock. Diluted EPS for the 12   weeks ended March 21, 2017   excludes 29,071   shares of restricted stock ,   and options to purchase 568,457   s hares of common stock ,   which were outstanding during the period, but were antidilutive. Diluted EPS for the 12   weeks ended March 22, 2016 excludes 71,448   shares of restricted stock and options to purchase   653,668   shares of common stock , which were outstanding during the period but were anti dilutive. The following table details the Company’s basic and diluted earnings per common share calculation (dollars in thousands, except   per share data) :





 

 

 

 

 



 

 

 

 

 



12 Weeks Ended



March 21,

 

March 22,



2017

 

2016

Net income

$

3,310 

 

$

5,411 

Shares:

 

 

 

 

 

Weighted average number of common shares outstanding

 

23,059,363 

 

 

23,315,077 

Dilutive shares

 

217,179 

 

 

83,038 

Total Diluted Shares

 

23,276,542 

 

 

23,398,115 



 

 

 

 

 

Basic earnings per common share

$

0.14 

 

$

0.23 

Diluted earnings per common share

$

0.14 

 

$

0.23 













































 

3 .

STOCK-BASED EMPLOYEE COMPENSATION

2012 Long-Term Equity Incentive Plan

On July 16, 2012, the Company adopted the Del Frisco’s Restaurant Group, Inc. 2012 Long-Term Equity Incentive Plan (the “2012 Plan”), which allows the Company to grant stock options, restricted stock, restricted stock units, deferred stock units and other equity-based awards to directors, officers, key employees and other key individuals performing services for the Company. The 2012 Plan provides for granting of options to purchase shares of common stock at an exercise price not less than the fair value of the stock on the date of grant. Equity-based awards   vest or become exercisable at various periods ranging from one to four years from the date of grant. The 2012 Plan has 2,232,800 shares of common stock authorized for issuance under the plan. There were 866,450 shares of common stock issuable upon exercise of outstanding options and 520,428 shares of unvested restricted stock outstanding a t   March 21, 2017   with   773,509 shares   of common stock available for future grants.



The following table details the Company’s total s hare -based compensation cost during the 12 weeks ended March 21, 2017 and March 22, 2016 as well as where the costs were expensed (in thousands):





 

 

 

 

 





12 Weeks Ended



March 21,

 

March 22,



2017

 

2016

Restaurant operating expenses

$

73 

 

$

93 

General and administrative costs

 

460 

 

 

560 

Total stock compensation cost

$

533 

 

$

653 



 

9


 

Restricted Stock and Restricted Stock Units

The following table summarizes restricted stock and restricted stock unit activity during the 12 week s ended March 21, 2017 :





 

 

 

 

 

 

 

 





12 Weeks Ended March 21, 2017



Shares

 

Weighted average grant date fair value

 

Aggregate intrinsic value ($000's)

Outstanding at beginning of period

 

345,519 

 

$

12.57 

 

 

 

Granted

 

203,495 

 

 

17.15 

 

 

 

Vested

 

(10,382)

 

 

16.79 

 

 

 

Forfeited

 

(18,204)

 

 

16.92 

 

 

 

Outstanding at end of period

 

520,428 

 

$

14.13 

 

$

9,081 



As of March 21, 2017 ,   there was $ 6.1 million of total unrecognized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a period of approximately 2.6 years.  

Stock Options

The following table summarizes stock option activity during the 12 week s ended March 21, 2017 :











 

 

 

 

 

 

 

 

 

 

 





12 Weeks Ended March 21, 2017



Shares

 

Weighted average exercise price

 

Weighted average remaining contractual term

 

Aggregate intrinsic value ($000's)

Outstanding at beginning of period

 

927,675 

 

$

18.33 

 

 

 

 

 

 

Exercised

 

(30,100)

 

 

13.00 

 

 

 

 

 

 

Forfeited

 

(31,125)

 

 

21.00 

 

 

 

 

 

 

Outstanding at end of period

 

866,450 

 

$

18.42 

 

 

5.5 years

 

$

1,314 

Options exercisable at end of period

 

735,075 

 

$

17.95 

 

 

5.3 years

 

$

1,308 



A summary of the status of non-vested stock options as of March 21, 2017 and changes during the 12 weeks ended March 21, 2017 is presented below:







 

 

 

 



 

 

 

 



12 Weeks Ended



March 21, 2017



Shares

 

Weighted average grant-date fair value

Non-vested stock options at beginning of period

151,625 

 

$

8.44 

Vested

(3,000)

 

 

9.99 

Forfeited

(17,250)

 

 

8.50 

Non-vested stock options at end of period

131,375 

 

$

8.40 



As of March 21, 2017 , there was $ 0.4 million of total unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a period of approximately 0.6 year s .





 











10


 











 

4 .

LONG-TERM DEBT



On October 15, 2012 ,   the Company entered into a credit facility that , as last amended on April   21 , 201 7 , provides for a n unsecured credit facility   with a credit commitment of $10.0 million, subject to increases in increments of $5.0 million, with a maximum amount of   $30.0   million. The credit facility expires on October 15, 2019 .   Borrowings under the credit facility bear interest, at the option of the Company, based on (i) LIBOR plus 1.50% or (ii) the prime rate as defined in the credit facility. The Company is required to pay a commitment fee equal to 0.25%  per annum on the available but unused credit facility . The credit facility is guaranteed by certain subsidiaries of the Company. The credit facility contains various financial covenants, including a maximum ratio of total indebtedness to EBITDA and minimum fixed charge coverage, both as defined in the credit agreement. The credit facility also contains covenants restricting certain corporate actions, including asset dispositions, acquisitions, the payment of dividends, the incurrence of indebtedness and providing financing or othe r transactions with affiliates. On April 21, 2017, subsequent to the end of the quarter, we entered into an amendment to our credit facility with JP Morgan Chase Bank that lowered the minimum fixed charge coverage ratio, as defined in the agreement, from 2.00 to 1.25, effective January 1, 2017.

As of March 21, 2017 , there was $22.0 million of outstanding borrowings on the Company’s credit facility, and the Company had approximately $6.8 million of borrowings available, with $1.2 million in outstanding letters of credit commitments. As of December 27, 2016, there were no outstanding borrowings on the Company’s credit facility and $1.2 million in outstanding letters of credit .   The increase in borrowings under the credit facility during the first quarter of 2017 related to the Company’s share repurchase activities during the period. The Company was in compliance with all of the financial debt covenants as of March 21, 2017 and December 27, 2016 .



 



5 .

INCOME TAXES

The effective income tax rate for the 12   weeks ended March 21, 2017   was 24.7% ,   compared to 31.1%   for the 12 weeks ended March 22, 2016 . The factors that cause the effective tax rates to vary from the federal statutory rate of 35% include the impact of FICA tip and other credits, partially offset by state income taxes and certain non-deductible expens es .

 





 



 

6 .

FAIR VALUE MEASUREMENT

Under GAAP, the Company is required to measure certain assets and liabilities at fair value, or to disclose the fair value of certain assets and liabilities recorded at cost. Pursuant to these fair value measurement and disclosure requirements, fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value is calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities includes consideration of non-performance risk, including the Company’s own credit risk. Each fair value measurement is reported in one of the following three levels:

Level 1—valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

Level 2—valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—valuation inputs are unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.



The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 21, 2017 and December 27, 2016 , respectively (in thousands):







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



Fair Value Measurements



Level

 

March 21, 2017

 

December 27, 2016

Deferred compensation plan investments (included in Other assets)

 

2

 

$

15,501 

 

$

15,054 

Deferred compensation plan liabilities (included in Other liabilities)

 

2

 

$

13,684 

 

$

15,212 



There were no transfers among levels within the fair-value hierarchy during the first   quarter s of fiscal 2017 and fiscal 2016 .   The carrying value of the Company’s cash and cash equivalents, receivables and accounts payable approximate fair value due to their short term nature. The fair value of the cred it facility approximate s its carrying value since it is a variable rate credit facility (Level 2) .



11


 



 



 

7.

SEGMENT REPORTING



The Company operates the Del Frisco’s, Sullivan’s, and Grille brands as operating segments. The restaurant concepts operate solely in the U.S. within the full-service dining industry, providing similar products to similar customers. Sales from external customers are derived principally from food and beverage sales, and the Company does not rely on any major customers as a source of sales. The restaurant concepts also possess similar economic characteristics, resulting in similar long-term expected financial performance characteristics. However, as Del Frisco’s restaurants typically have higher revenues, driven by their larger physical presence and higher average check, the Del Frisco’s, Sullivan’s, and Grille operating segments have varying operating income and restaurant-level EBITDA margins due to the leveraging of higher revenues on certain fixed operating costs such as management labor, rent, utilities, and building maintenance.

The following tables present information about reportable segments (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



12 Weeks Ended March 21, 2017



Del Frisco's

 

Sullivan's

 

Grille

 

Corporate

 

Consolidated

Revenues

$

39,760 

 

$

17,782 

 

$

26,348 

 

$

 —

 

$

83,890 

Restaurant-level EBITDA

 

10,698 

 

 

3,498 

 

 

3,762 

 

 

 —

 

 

17,958 

Capital expenditures

 

4,475 

 

 

3,916 

 

 

3,287 

 

 

107 

 

 

11,785 

Property and equipment

 

120,349 

 

 

53,299 

 

 

119,728 

 

 

2,533 

 

 

295,909 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



12 Weeks Ended March 22, 2016



Del Frisco's

 

Sullivan's

 

Grille

 

Corporate

 

Consolidated

Revenues

$

38,343 

 

$

18,901 

 

$

23,950 

 

$

 —

 

$

81,194 

Restaurant-level EBITDA

 

10,713 

 

 

3,548 

 

 

3,768 

 

 

 —

 

 

18,029 

Capital expenditures

 

1,284 

 

 

208 

 

 

1,270 

 

 

 

 

2,769 

Property and equipment

 

105,788 

 

 

47,786 

 

 

100,641 

 

 

2,457 

 

 

256,672 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

In addition to using consolidated results in evaluating the Company’s performance and allocating its resources, the Company’s chief operating decision maker uses restaurant-level EBITDA, which is not a measure defined by GAAP. The Company defines restaurant-level EBITDA as income   before income taxes, other income (expenses), net, pre-opening costs, general and administrative costs, consulting project costs, lease termination and clos ing costs , and depreciation and amortization. Pre-opening costs are excluded because they vary in timing and magnitude and are not related to the health of ongoing operations. General and administrative cost s are only included in the Company’s consolidated financial results as they are generally not specifically identifiable to individual operating segments as these costs relate to supporting all of the restaurant operations of the Company and the extension of the Company’s concepts into new markets. Lease termination and clos ing costs ,   consulting project costs, impairment charges , and d epreciation and amortization are excluded because they are not ongoing controllable cash expenses , and they are not related to the health of ongoing operations. Property and equipment is the only balance sheet measure used by the Company’s chief operating decision maker in allocating resources.

12


 

T he following table reconciles   net income to restaurant-level EBITDA (in thousands) .





 

 

 

 

 



 

 

 

 

 



12 Weeks Ended



March 21, 2017

 

March 22, 2016



 

 

 

 

 

Net income

$

3,310 

 

$

5,411 

Income tax expense

 

1,086 

 

 

2,437 

Net income before income taxes

 

4,396 

 

 

7,848 

Interest expense, net of capitalized interest

 

10 

 

 

31 

Other  

 

 

 

 —

Operating income

 

4,408 

 

 

7,879 

Pre-opening costs

 

389 

 

 

94 

General and administrative costs

 

6,311 

 

 

5,750 

Consulting project costs

 

2,036 

 

 

 —

Lease termination and closing costs

 

(2)

 

 

21 

Depreciation and amortization

 

4,816 

 

 

4,285 

Restaurant-level EBITDA

$

17,958 

 

$

18,029 



 

 

 

 

 





8 .

COMMITMENTS AND CONTINGENCIES

The Company is subject to various claims, possible legal actions, and other matters arising out of the normal course of business. While it is not possible to predict the outcome of these issues, management is of the opinion that adequate provision for potential losses has been made in the accompanying condensed consolidated financial statements and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

At March 21, 2017 and December 27, 2016 , the Company had outstanding letters of credit of $1. 2 million ,   which were drawn on the Company’s credit facility (see Note 4 ,   Long-Term Debt ) . The letters of credit typically act as guarantee of payment to certain third parties in accordance with specified terms and conditions.







 

9.

RELATED PARTY TRANSACTIONS

On March   10 , 2017, the Company purchased 1,200,000 shares of its common stock for $20.3 million from Fidelity National Financial ,   Inc. (“Fidelity” ). Fidelity wa s considered a related party to the Company at the time of the transaction due to the   level of ownership interest in the Company . After this transaction, Fidelity ’s ownership interest no longer qualifies it as a related party .









13


 





 



 

 Item 2 .

Management’s Discussion and Analysis of Financial Condition and Results of Operations



Cautionary Statement

Certain statements made or incorporated by reference in this report and our other filings with the Securities and Exchange Commission, in our press releases and in statements made by or with the approval of authorized personnel constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are subject to the safe harbor created thereby. Forward looking statements reflect intent, belief, current expectations, estimates or projections about, among other things, our industry, management’s beliefs, and future events and financial trends affecting us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward looking statements. Although we believe the expectations reflected in any forward looking statements are reasonable, such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward looking statements as a result of various factors. These differences can arise as a result of the risks described in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2016 , filed February 28, 2017 , or the 2016 10-K, as well as other factors that may affect our business, results of operations, or financial condition. Forward looking statements in this report speak only as of the date hereof, and forward looking statements in documents incorporated by reference speak only as of the date of those documents. Unless otherwise required by law, we undertake no obligation to publicly update or revise these forward looking statements, whether a s a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward looking statements contained in this report will, in fact, transpire.

Overview

Del Frisco’s Restaurant Group develops, owns and operates three contemporary, high-end, complementary restaurants: Del Frisco’s Double Eagle Steak House, or Del Frisco’s, Sullivan’s Steakhouse, or Sullivan’s, and Del Frisco’s Grille, or the Grille. As of the end of the period covered by this report, w e operate d   5 3 restaurants in 24 states and the District of Columbia . Of the se   53 , there were 1 2 Del Frisco’s restaurants, 1 8 Sullivan’s restaurants and 2 3 Grille restaurants. Subsequent to the end of the first quarter of 2017, we closed one Sullivan’s location in Seattle, Washington.

Unless the context otherwise indicates, all references to “we,” “our,” “us,” or the “Company” refer to Del Frisco’s Restaurant Group, Inc. and its subsidiaries.

Our Growth Strategies and Outlook. Our growth model is comprised of the following three primary drivers:

 

 

 

Pursue Disciplined Restaurant Growth. We believe that there are significant opportunities to grow our concepts on a nationwide basis in both existing and new markets where we believe we can generate attractive unit-level economics. We are presented with many development opportunities , and we carefully evaluate each opportunity to determine that sites selected for development have a high probability of meeting our return on investment targets. Our disciplined growth strategy includes accepting only those sites that we believe present attractive rent and tenant allowance structures as well as reasonable construction costs given the sales potential of the site. We believe our concepts’ complementary market positioning and ability to coexist in the same markets, coupled with our flexible unit models, will allow us to expand each of our three concepts into a greater number of locations.



 

 

 

Grow Existing Revenue. We will continue to pursue opportunities to increase the sales at our existing restaurants, pursue targeted local marketing efforts and evaluate operational initiatives, including growth in private dining, designed to increase restaurant unit volumes.



 

 

 

Maintain Margins Throughout Our Growth. We will continue to aggressively protect our margins using economies of scale, including marketing and purchasing synergies between our concepts and leveraging our corporate infrastructure as we continue to open new restaurants.



In general, w e believe t here are opportunities to open four to six restaurants annually, generally composed of one Del Frisco’s and three to f ive Sullivan’s and/or Grilles, with new openings of our Grille concept likely serving as the primary driver of new unit growth in the near term.   D uring the first quarter of 201 7 ,   we did not open any restaurants.  W e expect to open one   Del Frisco’s restaurant and one Grille restaurant   prior to the end of fiscal 201 7 .

 

14


 



Performance Indicators. We use the following key metrics in evaluating the performance of our restaurants:

 

 

 

Comparable Restaurant Sales .   We consider a restaurant to be comparable during the first full fiscal quarter following the eighteenth month of operations. Changes in comparable restaurant sales reflect changes in sales for the comparable group of restaurants over a specified period of time , and also reflect changes in customer count trends as well as changes in average check. Our comparabl e restaurant base consisted of 4 1 and 3 8 restaurants at March 21, 2017 and March 22, 2016 , respectively.



 

 

 

Average Check. Average check is calculated by dividing total restaurant sales by customer counts for a given time period. Average check is influenced by menu prices and menu mix. Management uses this indicator to analyze trends in customers’ preferences, the effectiveness of menu changes and price increases and per customer expenditures.



 

 

 

Average Weekly Volume. Average weekly volume, or A W V, consists of the average weekly sales of our restaurants over a certain period of time. This measure is calculated by dividing total revenues within a period by the number of restaurants operating weeks during the relevant period. This indicator assists management in measuring changes in customer traffic, pricing and development of our concepts.



 

 

 

Customer Counts . Customer counts are measured by the number of entrées ordered at our restaurants over a given time period.



 

 

 

Restaurant-Level EBITDA Margin . Restaurant-level EBITDA margin , a non-GAAP financial measure,   represents income before income taxes, other income (expenses), net, pre-opening costs, general and administrative costs, consulting project costs, lease termination and closing costs , impairment charges and depreciation and amortization as a percentage of revenues . By monitoring and controlling our restaurant-level EBITDA margins, we can gauge the overall profitability of our core restaurant operations. See Note 7 ,   Segment Reporting in the notes to our condensed consolidated financial statements for additional information on restaurant-level EBITDA.



Our business is subject to seasonal fluctuations. Historically, the percentage of our annual revenues earned during the first and fourth fiscal quarters has been higher due, in part, to increased gift card redemptions and increased private dining during the year-end holiday season, respectively. In addition, our first, second and third quarters each contain 12 operating weeks with the fourth quarter containing 16 or 17 operating weeks. As many of our operating expenses have a fixed component, our operating income and operating income margin have historically varied significantly from quarter to quarter. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year.

 

Results of Operations

The following table shows our operating results (in thousands), as well as our operating results as a percentage of revenues, for the 12   weeks ended March 21, 2017 and March 22, 2016 .







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



12 Weeks Ended



March 21,

 

March 22,



2017

 

2016

Revenues

$

83,890 

 

100.0% 

 

$

81,194 

 

100.0% 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Costs of sales

 

23,781 

 

28.3% 

 

 

23,218 

 

28.6% 

Restaurant operating expenses

 

40,851 

 

48.7% 

 

 

38,626 

 

47.6% 

Marketing and advertising costs

 

1,300 

 

1.5% 

 

 

1,321 

 

1.6% 

Pre-opening costs

 

389 

 

0.5% 

 

 

94 

 

0.1% 

General and administrative costs

 

6,311 

 

7.5% 

 

 

5,750 

 

7.1% 

Consulting project costs

 

2,036 

 

2.4% 

 

 

 —

 

0.0% 

Lease termination and closing costs

 

(2)

 

0.0% 

 

 

21 

 

0.0% 

Depreciation and amortization

 

4,816 

 

5.7% 

 

 

4,285 

 

5.3% 

Operating income

 

4,408 

 

5.3% 

 

 

7,879 

 

9.7% 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

Interest, net of capitalized interest

 

(10)

 

0.0% 

 

 

(31)

 

0.0% 

Other  

 

(2)

 

0.0% 

 

 

 —

 

0.0% 

Income before income taxes

 

4,396 

 

5.2% 

 

 

7,848 

 

9.7% 

Income tax expense

 

1,086 

 

1.3% 

 

 

2,437 

 

3.0% 

Net income

$

3,310 

 

3.9% 

 

$

5,411 

 

6.7% 



































15


 



Fiscal Quarter Ended March 21, 2017 (12 weeks) Compared to the Fiscal Quarter Ended March 22, 2016 (12 weeks)

The following tables show our operating results (in thousands) by segment and on a consolidated basis , as well as our operating results as a percentage of revenues, for the 12 weeks ended March 21, 2017 and March 22, 2016 . The tables below include Restaurant-level EBITDA, a non-GAAP measure. See Note 7, Segment Reporting in the notes to our condensed consolidated financial statements for additional information on this metric, including a reconciliation to net income, the most directly comparable GAAP measure.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





12 Weeks Ended March 21, 2017



Del Frisco's

 

Sullivan's

 

Grille

 

Consolidated

Revenues

$

39,760 

 

100.0% 

 

$

17,782 

 

100.0% 

 

$

26,348 

 

100.0% 

 

$

83,890 

 

100.0% 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

11,770 

 

29.6% 

 

 

5,254 

 

29.5% 

 

 

6,757 

 

25.6% 

 

 

23,781 

 

28.3% 

Restaurant operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Labor

 

9,688 

 

24.4% 

 

 

5,405 

 

30.4% 

 

 

9,005 

 

34.2% 

 

 

24,098 

 

28.7% 

Operating expenses

 

4,136 

 

10.4% 

 

 

2,545 

 

14.3% 

 

 

3,579 

 

13.6% 

 

 

10,260 

 

12.2% 

Occupancy

 

2,872 

 

7.2% 

 

 

765 

 

4.3% 

 

 

2,856 

 

10.8% 

 

 

6,493 

 

7.7% 

Restaurant operating expenses

 

16,696 

 

42.0% 

 

 

8,715 

 

49.0% 

 

 

15,440 

 

58.6% 

 

 

40,851 

 

48.7% 

Marketing and advertising costs

 

596 

 

1.5% 

 

 

315 

 

1.8% 

 

 

389 

 

1.5% 

 

 

1,300 

 

1.5% 

Restaurant-level EBITDA

$

10,698 

 

26.9% 

 

$

3,498 

 

19.7% 

 

$

3,762 

 

14.3% 

 

$

17,958 

 

21.4% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant operating weeks

 

144 

 

 

 

 

208 

 

 

 

 

276 

 

 

 

 

628 

 

 

Average weekly volume

$

276 

 

 

 

$

85 

 

 

 

$

95 

 

 

 

$

134 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



12 Weeks Ended March 22, 2016



Del Frisco's

 

Sullivan's

 

Grille

 

Consolidated

Revenues

$

38,343 

 

100.0% 

 

$

18,901 

 

100.0% 

 

$

23,950 

 

100.0% 

 

$

81,194 

 

100.0% 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

11,397 

 

29.7% 

 

 

5,566 

 

29.4% 

 

 

6,255 

 

26.1% 

 

 

23,218 

 

28.6% 

Restaurant operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Labor

 

9,124 

 

23.8% 

 

 

5,529 

 

29.3% 

 

 

7,995 

 

33.4% 

 

 

22,648 

 

27.9% 

Operating expenses

 

3,930 

 

10.2% 

 

 

2,702 

 

14.3% 

 

 

3,091 

 

12.9% 

 

 

9,723 

 

12.0% 

Occupancy

 

2,561 

 

6.7% 

 

 

1,198 

 

6.3% 

 

 

2,496 

 

10.4% 

 

 

6,255 

 

7.7% 

Restaurant operating expenses

 

15,615 

 

40.7% 

 

 

9,429 

 

49.9% 

 

 

13,582 

 

56.7% 

 

 

38,626 

 

47.6% 

Marketing and advertising costs

 

618 

 

1.6% 

 

 

358 

 

1.9% 

 

 

345 

 

1.4% 

 

 

1,321 

 

1.6% 

Restaurant-level EBITDA

$

10,713 

 

27.9% 

 

$

3,548 

 

18.8% 

 

$

3,768 

 

15.7% 

 

$

18,029 

 

22.2% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant operating weeks

 

144 

 

 

 

 

216 

 

 

 

 

240 

 

 

 

 

600 

 

 

Average weekly volume

$

266 

 

 

 

$

88 

 

 

 

$

100 

 

 

 

$

135 

 

 



Revenues. Consolidated revenues increased $ 2.7 million, or 3.3 %, to $ 83.9 million in the first   quarter of fiscal 201 7 from $ 81.2 million in the first quarter of fiscal 201 6 . This increase was due to 28 net additional operating weeks in the first quarter of 201 7 , resulting from   four new restaurant openings over the past four quarters .   This increase was partially offset by de creased revenue at our comparable restaurants ,   the temporary closure of the King of Prussia Sullivan’s restaurant, and decreased traffic at the Indianapolis and Wilmington Sullivan’s restaurants due to remodel work. These three Sullivan’s locations were removed from the comparable restaurant base for the first quarter of 2017 as they were either fully or partially closed for a significant portion of the quarter .   Co mparable restaurant sales de creased 0 . 2 % for the first quarter of fiscal 201 7 ,   driven by a 0 . 8 %   de crease in average check ,   partially offset by a 0.6 % increase in customer counts .   During the first quarter of 201 7 , comparable r estaurant sales experienced a 5 0 basis point negative impact from three restaurants in a region that we believe w as impacted by challenges in the energy industry.

Del Frisco’s revenues in creased $ 1.4 million, or 3 . 7 %, to $ 3 9.8 million in the first quarter of fiscal 201 7 from $ 3 8.3 million in the first quarter of fiscal 201 6 .   Th is   in crease was primarily due to increased average weekly sales at   the relocated Dallas and Orlando Del Frisco’s restaurant s .   This increase was partially offset by a   0.5 % decrease in comparable restaurant sales ,   comprised of a 1.2 %   decrease in customer counts, partially offset by a   0.7 %   in crease in average check .

16


 

Sullivan’s revenues de creased $ 1.1 million, or 5.9 %, to $ 1 7.8 million in the first quarter of fiscal 201 7 from $ 18.9 million in the first quarter of fiscal 201 6 .   The de crease in revenues was primarily due to the loss of 8 operating weeks due to the temporary closure of the King of Prussia Sullivan’s restaurant, and decreased traffic at the Indianapolis and Wilmington Sullivan’s restaurants due to remodel work . This decrease was partially offset by a 1.1% increase in comparable restaurant sales , comprised of a 1 .9% increase in customer counts, partially offset by a 0 .8% decrease in average check.

Grille revenues increased $ 2 . 4 million, or 10.0 %, to $ 2 6.3 million in the first quarter of fiscal 201 7 from $ 23.9 million in the first quarter of fiscal 201 6 . This increase was primarily   due to   3 6   additional operating weeks provided by three new restaurant opening s   over the past four quarters .   This increase was partially offset by a   0.9% decrease in c omparable restaurant sales ,   comprised a 2.0 % decrease in average check ,   partially offset by a 1.1 %   in crease in customer counts .  

Cost of Sales . Consolid ate d cost of sales increased $ 0. 6 million, or 2 . 4 %, to $ 2 3.8 million in the first quarter of fiscal 201 7 from $ 23.2 million in the first quarter of fiscal 201 6 . This increase was primarily due to a net additional 28 operating weeks in the first quarter of 2017, as discussed above . As a percentage of consolidated revenue s, consolidated cost of sales de creased to 2 8. 3 % during the first quarter of fiscal 201 7 from 2 8.6 % in the first quarter of fiscal 201 6 .

As a percentage of revenue s, Del Frisco’s cost of sales   decreased to   29. 6 % during the first quarter of fiscal 201 7 from 29.7 %   in the first quarter of fiscal 201 6 . This decrease in cost of sales, as a percentage of revenues, was primarily due to decreased beef costs .

As a percentage of revenues, Sullivan’s  c ost of sales increas ed to 29.5 % during the first quarter of fiscal 201 7   from 29.4 %   in the first quarter of fiscal 201 6 . This in crease in cost of sales, as a percentage of revenues, was primarily due to in creased liquor, beer, and wine   costs.

As a percentage of revenues, Grille cost o f sales de creased to 2 5. 6 % during the first quarter of fiscal 201 7 from 2 6 . 1 % in the first quarter of fiscal 201 6 .   This de crease in cost of sales, as a percentage of revenues, was primarily due to decreased wine costs.

Restaurant Operating Expenses. Consolidated restaurant operating expenses increas ed $ 2 . 2 million, or 5. 8 %, to $ 40. 9 million in the first quarter of fiscal 201 7 from $ 38.6  million in the first quarter of fiscal 201 6 .   This increase was primarily due to a net additional 28 operating weeks in the first quarter of 2017, as discussed above . As a percentage of consolidated revenues, consolidated restaurant operating expenses increased to 48. 7 % in the first quarter of fiscal 201 7 from 47.6 % in the first quarter of fiscal 201 6 .

 

As a percentage of revenues, Del Frisco’s restaurant operating expenses increased to 42.0 % during the first quarter of fiscal 201 7 from 40.7 % during the first quarter of fiscal 201 6 .   This in crease in restaurant operating expenses, as a percentage of revenues, was primarily due to higher labor and benefits costs and occupancy costs ,   as well as the de leveraging effect of certain fixed and semi-variable costs in relation to reduced comparable sales in certain   restaurants .

As a percentage of revenues, Sullivan’s restaurant operating expenses de creased to 49. 0 % during the first quarter of fiscal 201 7 from 49.9 % in the first quarter of fiscal 201 6 . This de crease in restaurant operating expenses, as a percentage of revenues, was primarily due to lower occupancy costs, partially offset by higher   labor and benefits costs .

As a percentage of revenues, Grille restaurant operating expenses in creased to 58.6 % during the first quarter of fiscal 201 7 from 5 6.7 % in the first quarter of fiscal 201 6 . This increase in restaurant operating expenses, as a percentage of revenues, was primarily due to higher labor and benefits costs ,   higher   other operating expenses, and higher occupancy costs .

Marketing and Advertising Costs . Consolidated marketing and ad vertising costs remained constant at $ 1. 3   million in the first quarter of fiscal 201 7   compared to the first quarter of fiscal 201 6 . As a percentage of consolidated revenues, consolidated ma rketing and advertising costs de creased to 1 . 5 % in the first quarter of fiscal 201 7 from 1 . 6 % in the first quarter of fiscal 201 6 .

As a percentage of revenues, Del Frisco’s marketing and advertising costs de creased to 1.5 % during the first quarter of fiscal 201 7 from 1.6 % in the   first quarter of fiscal 201 6 . Marketing and advertising costs, as a percentage of revenues, de creased primarily due to lower   broadcast media   and   other   market ing costs.

As a percentage of revenues, Sullivan’s marketing and advertising costs de creased to 1.8 % during the first qua rter of fiscal 201 7 from 1.9 % in the first quarter of fiscal 201 6 . Marketing and advertising costs, as a percentage of revenues, de creased primarily due to lower   broadcast media and other marketing costs.

As a percentage of revenues, Grille ma rketing and advertising costs in creased to 1.5 % during the first quarter of fiscal 201 7 compared to 1.4 % in the first quarter of fiscal 201 6 .   The in crease in marketing and advertising costs, as a percentage of revenues, was primarily due to higher digital advertising costs .  

Pre-opening Costs . Pre-opening costs in creased by $ 0. 3 million to $ 0.4 million in the first   quarter of fiscal 201 7 from $ 0.1 million in the first quarter of fiscal 201 6 due primarily the timing of new restaurants under construction versus the prior year comparable period . Pre-opening costs include non-cash straight line rent, which is incurred during construction and can precede a restaurant opening by four to six months.

General and Administrative Costs . General and administrative costs increased to $6. 3 million  i n the first   quarter of fiscal 201 7   from $5.8 million in the first quarter of fiscal 201 6 . As a percentage of revenues, gen eral and administrative costs in creased t o   7. 5 % in the first quarter of

17


 

fiscal 201 7 compared to 7. 1 % in the first quarter of fiscal 201 6 . General and administrative costs are expected to increase as a result of costs related to our anticipated growth, including further investments in our infrastructure. As we are able to leverage these investments made in our people and systems, we expect these expenses to decrease as a percentage of total revenues over time.

Consulting Project Costs Consulting project costs were $2.0 million in the first quarter of 2017. These costs are primarily related to consumer insight research supporting the Grille restaurants and are expected to continue through the second quarter of 2017, with the majority of expected expenses occurring during the first quarter of 2017. No such costs were incurred in the first quarter of fiscal 2016.

Depreciation and Amortization . Depreciation  a nd amortization increased $ 0. 5 million, or 1 2 . 4 %, to $ 4. 8 million in the   first quarter of fiscal 201 7 from $ 4.3 million in the first quarter of fiscal 201 6 . The increase in depreciation and amortization expense primarily resulted from restaurant openings and remodeled restaurants over the past five quarters .

Income Tax Expense The effective income tax   rate for the   first quarter of fiscal 201 7 was 24.7 % compared to   31.1 % for the first quarter of fiscal 201 6 . The factors that cause the effective tax rates to vary from the federal statutory ra t e of 35% include the impact of FICA tip and other credits, partially offset by state income taxes and certain non-deductible expenses.  



Liquidity and Capital Resources

Our principal liquidity requirements are our lease obligations and capital expenditure needs. We expect to finance our operations for at least the next several years, including costs of opening currently planned new restaurants, through cash provided by operations and borrowings available under our credit facility. However, w e cannot be sure that these sources will be sufficient to finance our operations, and we may seek additional financing in the future. As of March 21, 2017 , we had cash and cash equivalents of approximately $ 8.7  million .

Our operations have not required significant working capital and, like many restaurant companies, we may at times have negative working capital. Revenues are received primarily in cash or by credit card, and restaurant operations do not require significant receivables or inventories, other than our wine inventory. In addition, we receive trade credit for the purchase of food, beverages and supplies, thereby reducing the need for incremental working capital to support growth.

The following table presents a sum mary of our cash flow s for the 12 weeks ended March 21, 2017 and March 22, 2016 (in thousands):







 

 

 

 

 



 

 

 

 

 



12 Weeks Ended



March 21,

 

March 22,



2017

 

2016

Net cash provided by operating activities

$

9,079 

 

$

5,265 

Net cash used in investing activities

 

(11,945)

 

 

(4,028)

Net cash used in financing activities

 

(3,029)

 

 

(4,360)

Net change in cash and cash equivalents

$

(5,895)

 

$

(3,123)



Operating Activities Net cash flows provided by operating activities in creased $ 3. 8 million during the 12 weeks ended March 21, 2017 as compared to the 12 weeks ended March 22, 2016 , prim arily due to a $4. 9 million increase in cash related to accounts payable, a $ 2 . 1 million increase in cash related to deferred rent obligations, and a $1.7 million increase in cash relate d to prepaid expenses and other assets ,   partially offset by a $ 2 . 1 million de crease in net income, a $2. 4 million decrease in cash related to other liabilities, and a $0.5 million decrease in cash related to the amortization of deferred lease incentives .

Investing Activities . Net cash used i n investing activities for the 12 weeks ended March 21, 2017 was $ 11.9 million, consisting primarily   of purchases of property and equipment. The property and equipment purchases primarily related to construction in progress of one Del Frisco’s restaurant and one Grille restaurant and remodel activity of existing restaurants .   Net cash used in investing activities for the 12 weeks ended March 22, 2016 was $ 4.0 million, consisting primarily of purchases of property and equipment. These purchases primarily related to construction of one Del Frisco’s restaurant and one Grille restaurant   in progress at the end of the period and remodel activity of existing restaurants .

Financing Activities .   Net cash used in financing activities for the 12 wee ks ended March 21, 2017 was $ 3.0 millio n, which was primarily due to $ 2 5 . 1 million of treasury stock repurchases, partially offset by $22.0 million in proceeds from our credit facility .   Net cash used in financing activities for the 12 weeks e nded March 22, 2016   was  $ 4. 4 million , primarily related to $ 4.5 million of payments on the outstanding balance under our credit facility .

Capital Expenditures . We typically target an average cash investment of approximately $7.0 million to $9.0 million per restaurant for a Del Frisco’s restaurant and $3.0 million to $4.5 million for a Sullivan’s restaurant or a Grille restaurant , in each case net of landlord contributions and equipment financing and including pre-opening costs. In addition, we are currently “refreshing” a number of our Sullivan’s and Del Frisco’s restaurants . These capital expenditures will primarily be funded by cash flows from operations and, if necessary, by the use of our credit facility, depending upon the timing of expenditures.

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Credit F acility .   See Note 4, Long-Term Debt in the notes to our condensed consolidated financial statements for information regarding our credit facility.

We believe that net cash provided by operating activities and available borrowings under our credit facility will be sufficient to fund currently anticipated working capital, planned capital expenditures and debt service requirements for the next 24 months. We regularly review acquisitions and other strategic opportunities, which may require additional debt or equity financing.



Common Stock Repurchase Program.   On February 15, 2017, our Board of Directors modified our existing stock repurchase program, which was initially approved on October 14, 2014 (the “2014 Repurchase Program”), authorizing the Company to repurchase up to $50 million of its common stock from that date forward . Under the 2014 Repurchase Program , we may from time to time purchase our outstanding common stock in the open market at management’s discretion, subject to share price, market conditions and other factors. The 2014 Repurchase Program does not obligate us to repurchase any dollar amount or number of shares. As of March 21, 2017 , we had repurchased 1,974,806   shares of our common stock at a n aggregate cost of approximately $ 32.9 million since the inception of   the 2014 Repurchase Program .  



We repurchased 1 , 482 , 592 shares of our common stock at an aggregate cost of approximately $25.1 million during the 12 weeks ended March 21, 2017 .



Off-Balance Sheet Arrangements

At March 21, 2017 and December 27, 2016, we did not have any material off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.



Critical A ccounting Policies

There have been no material changes to the critical accounting policies from what was previously reported in the 201 6 10-K. The effects of new accounting pronouncements are discussed in Note 1 ,   Business and Basis of Presentation in the notes to our condensed consolidated financial statements.



Item 3 .

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are exposed to market risk from fluctuations in interest rates. For fixed rate debt, interest rate changes affect the fair market value of the debt but do not impact earnings or cash flows. Conversely for variable rate debt, including borrowings available under our credit facility, interest rate changes generally do not affect the fair market value of the debt, but do impact future earnings and cash flows, assuming other factors are held constant. As of March 21, 2017 , there w as   $22.0