BBQ HOLDINGS, INC. Overview
InSeptember 2019 a holding company reorganization was completed in whichFamous Dave's of America, Inc. ("FDA") became a wholly owned subsidiary of the new parent holding company namedBBQ Holdings, Inc. ("BBQ Holdings "). As used in this Form 10-K, "Company", "we" and "our" refer toBBQ Holdings and its wholly owned subsidiaries.BBQ Holdings was incorporated onMarch 29, 2019 under the laws of theState of Minnesota , while FDA was incorporated inMinnesota onMarch 14, 1994 . The Company develops, owns and operates restaurants under the name "Famous Dave's", "Village Inn ", "Granite City", "Real Urban Barbecue ", "Clark Crew BBQ", "Tahoe Joe's Steakhouse ", and "Bakers Square ." Additionally, the Company franchises restaurants under the name "Famous Dave's" and "Village Inn ". As ofJanuary 2, 2022 , there were 143 Famous Dave's restaurants operating in three countries, including 39 Company-owned restaurants and 104 franchise-operated restaurants. Additionally, the Company operates Famous Dave's ghost kitchens out of eight of itsGranite City restaurants. The first Clark Crew BBQ restaurant opened inDecember 2019 inOklahoma City, Oklahoma .BBQ Holdings has a 20% ownership in this venture. InMarch 2020 , the Company purchased 18 Granite City Food & Brewery restaurants located throughout the Midwest and oneReal Urban Barbecue restaurant located inVernon Hills, Illinois . OnJuly 30, 2021 , the Company completed the purchase of theVillage Inn family restaurant concept currently with 21 Company-owned restaurants and 108 franchised restaurants, and theBakers Square pie and comfort food concept currently with 14 Company-owned restaurants and four franchise-operated restaurants. OnOctober 4, 2021 , the Company opened its secondReal Urban Barbecue restaurant located inOak Brook, Illinois and onOctober 8, 2021 the Company acquired the Tahoe Joe's Steakhouse brand. 29
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Impact of the COVID-19 Virus on our business
InMarch 2020 , theWorld Health Organization declared the outbreak of a novel coronavirus ("COVID-19") as a pandemic andthe United States declared a National Public Health Emergency. As a result, public health measures were taken to minimize exposure to the virus. These measures, some of which are government-mandated, have been implemented globally resulting in a dramatic decrease in economic activity. During 2021, mandated restrictions began to ease in a number of the markets in which we operate. Although we have experienced some recovery from the initial impact of COVID-19, the long-term impact of COVID-19 on the economy and on our business remains uncertain, the duration and scope of which cannot currently be predicted. As new variants of COVID-19 are being discovered and cases in unvaccinated people rise throughout the markets in which we do business, we cannot predict the severity of another surge, what additional restrictions may be enacted, to what extent we can maintain off-premise sales volumes, whether we can maintain sufficient staffing levels, or if individuals will be comfortable returning to our dining rooms during or following social distancing protocols, and what long-lasting effects the COVID-19 pandemic may have on the restaurants industry as a whole. The potential impact of the COVID-19 pandemic on consumer spending behavior, which may be a function of continued concerns over safety and/or depressed consumer sentiment due to adverse economic conditions, including job losses, will determine the significance of the impact to our operating results and financial position. Due to the rapid development and fluidity of this situation, we cannot determine the ultimate impact that the COVID-19 pandemic will have on our consolidated financial condition, liquidity, and future results of operations.
Fiscal Year
Our fiscal year ends on the Sunday nearest toDecember 31st of each year. Our fiscal year is generally 52 weeks; however, it periodically consists of 53 weeks. The fiscal year endedJanuary 2, 2022 (fiscal 2021) consisted of 52 weeks while the fiscal year endedJanuary 3, 2021 (fiscal 2020) consisted of 53 weeks.
Basis of Presentation
The financial results presented and discussed herein reflect our results and the results of our wholly-owned and majority-owned consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior year amounts to conform to the current year's presentation.
Application of Critical Accounting Policies and Estimates
The following discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities and expenses, and related disclosures. On an on-going basis, management evaluates its estimates and judgments. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Management bases its estimates and judgments on historical experience, observance of trends in the industry, information provided by customers and other outside sources and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions. Our management believes the following critical accounting policies reflect its more significant judgments and estimates used in the preparation of our consolidated financial statements. Our company's significant accounting policies are described in Note 1 Nature of Business and Significant Accounting Policies to the consolidated financial statements included herein. We have discussed the development and selection of the following critical accounting policies with the Audit Committee of our Board of Directors and the Audit Committee has reviewed our disclosures relating to such policies in this Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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Recognition of Franchise-Related Revenue
We recognize franchise fee revenue on a straight-line basis over the life of the related franchise agreements and any exercised renewal periods. Cash payments are due upon the opening of a new restaurant or upon the execution of a renewal of the related franchise agreement. Our performance obligation with respect to franchise fee revenues consists of a license to utilize our brand for a specified period of time, which is satisfied equally over the life of each franchise agreement. Area development fees are deferred until a new restaurant is opened pursuant to the area development agreement, at which time revenue is recognized on a straight-line basis over the life of the franchise agreement. Cash payments for area development agreements are typically due when an area development agreement has been executed. Gift card breakage revenue is recognized proportionately as gift cards are redeemed utilizing an estimated breakage rate based on our historical experience. Gift card breakage revenue is reported within the licensing and other revenue line item of the consolidated statements of operations. The Company reports contributions from franchisees to our company's system-wideNational Advertising Fund (the "NAF") on a gross basis within the franchisee national advertising fund contributions line item on the consolidated statements of operations. Costs and Expenses
Restaurant costs and expenses include, among other items, food and beverage costs; labor and benefits costs; operating expenses, which include occupancy costs, repair and maintenance costs, supplies and advertising and promotion. Certain of these costs and expenses are variable and will increase or decrease with sales volume. The primary fixed costs are restaurant management salaries and occupancy costs. Our experience is that when a new restaurant opens, it incurs higher than normal levels of labor and food costs until operations stabilize, usually during the first three to six months of operations. As restaurant management and staff gain experience following a restaurant's opening, labor scheduling, food cost management and operating expense control typically improve to levels similar to those at our more established restaurants.
General and Administrative Expenses
General and administrative expenses include all corporate and administrative
functions, other than marketing and digital services. Salaries and benefits,
legal fees, accounting fees, professional consulting fees, travel, rent and
general insurance are major items in this category. Additionally, we record
expense for managers-in-training ("MITs") in this category.
Asset Impairment, Estimated Lease Termination and Other Closing Costs
We evaluate restaurant sites and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of restaurant sites to be held and used is measured by a comparison of the carrying amount of the restaurant site to the undiscounted future net cash flows expected to be generated on a restaurant-by-restaurant basis. If a restaurant is determined to be impaired, the loss is measured by the amount by which the carrying amount of the restaurant site exceeds its fair value. Fair value is estimated based on the best information available including estimated future cash flows, expected growth rates in comparable restaurant sales, remaining lease terms, discount rate and other factors. If these assumptions change in the future, we may be required to take additional impairment charges for the related assets. Considerable management judgment is necessary to estimate future cash flows. Accordingly, actual results could vary significantly from such estimates. Restaurant sites that are operating, but have been previously impaired, are reported at the lower of their carrying amount or fair value less estimated
costs to sell.
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Lease Accounting
We lease the property for our corporate headquarters, most of our Company-owned
stores, and certain office and restaurant equipment. We determine if an
arrangement is a lease at inception. Operating leases are included in operating
lease right-of use ("ROU") assets, current portion of operating lease
liabilities, and operating lease liabilities in the consolidated balance sheet.
ROU assets and operating lease liabilities are recognized based on the present
value of lease payments over the lease term, including any renewal options where
the renewal is reasonably assured at the commencement date. Because most of our
leases do not provide an implicit rate of return, we use our incremental
borrowing rate based on the information available at commencement date in
determining the present value of lease payments. Operating lease ROU assets are
reduced for lease incentives received. Where we are the lessee, at initial
adoption, we have elected to account for non-lease components associated with
its leases (e.g., common area maintenance costs) and lease components separately
for substantially all of its asset classes. Subsequent to adoption we will
combine lease and non-lease components.
We account for construction allowances by recording a receivable when its
collectability is considered probable, and relieve the receivable once the cash
is obtained from the landlord. We depreciate the leasehold improvements over the
lesser of their useful lives or the full term of the lease, including reasonably
assured renewal options and build-out periods. We record rent expense during the
build-out period and classify this expense in pre-opening expenses in our
consolidated statements of operations.
Liquor licenses
We own transferable liquor licenses in jurisdictions with a limited number of authorized liquor licenses. These licenses are capitalized as indefinite-lived intangible assets and are included in intangible assets, net in our consolidated balance sheets. We review annually these liquor licenses for impairment. Additionally, the costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies for nominal fees are expensed as incurred. Annual liquor license renewal fees are recognized in expense over
the renewal term. Accounts receivable, net We provide an allowance for uncollectible accounts on accounts receivable based on historical losses and existing economic conditions, when relevant. We provide for a general bad debt reserve for franchise receivables due to increases in days sales outstanding for which no payment plan or other payment arrangement exists. This general reserve is based on the aging of receivables meeting specified criteria and is adjusted each quarter based on past due receivable balances. Additionally, we have periodically established a specific reserve on certain receivables as necessary on a case-by-case basis. Any changes to the reserve are recorded in general and administrative expenses. Accounts receivable balances written off have not exceeded allowances provided. We believe all accounts receivable in excess of the allowance are fully collectible. If accounts receivable in excess of provided allowances are determined uncollectible, they are charged to expense in the period that determination is made. In assessing recoverability of these receivables, we make judgments regarding the financial condition of the franchisees based primarily on past and current payment trends, as well as other variables, including annual financial information, which franchisees are required to submit to us.
Stock-based compensation
We recognize compensation expense for share-based awards granted to team members
based on their fair values at the time of grant over the requisite service
period. Additionally, our board members receive share-based awards for their
board service. Our pre-tax compensation expense for stock options and other
incentive awards is included in general and administrative expenses in our
consolidated statements of operations.
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Income Taxes
We provide for income taxes based on our estimate of federal and state income
tax liabilities. These estimates include, among other items, effective rates for
state and local income taxes, allowable tax credits for items such as taxes paid
on reported tip income, estimates related to depreciation and amortization
expense allowable for tax purposes, and the tax deductibility of certain other
items. Our estimates are based on the information available to us at the time
that we prepare the income tax provision. We generally file our annual income
tax returns several months after our fiscal year-end. Income tax returns are
subject to audit by federal, state, and local governments, generally years after
the tax returns are filed. These returns could be subject to material
adjustments or differing interpretations of the tax laws. Accounting for
uncertain tax positions requires significant judgment including estimating the
amount, timing, and likelihood of ultimate settlement. Although we believe that
our estimates are reasonable, actual results could differ from these estimates.
Additionally, uncertain positions may be re-measured as warranted by changes in
facts or law.
Results of Operations - Fiscal Year 2021 Compared to Fiscal Year 2020
The following table presents items in our consolidated statements of operations as a percentage of net restaurant sales or total revenue, as indicated, for
the
periods presented:
Year Ended
January 2, 2022 January 3, 2021
Food and beverage costs(1) 29.8 % 30.9 %
Labor and benefits costs(1) 31.6 % 34.0 %
Operating expenses(1) 29.4 % 33.8 %
Restaurant-level operating margin(1)(2) 9.3 % 1.3 %
Depreciation and amortization expenses(3) 3.6 % 4.2 %
General and administrative expenses(3) 9.3 % 11.7 %
Income (loss) from operations(3) 4.0 % (9.2) %
(1) As a percentage of restaurant sales, net
(2) Restaurant-level operating margins are equal to restaurant sales, net, less
restaurant-level food and beverage costs, labor and benefits costs, and
operating expenses.
(3) As a percentage of total revenue
Total Revenue
Our components of and changes in revenue consisted of the following for the
fiscal years ended
Year Ended
(dollars in thousands) January 2, 2022 January 3, 2021 $ Change % Change Revenue: Restaurant sales, net $ 187,872 $ 109,544$ 78,328 71.5 % Franchise royalty and fee revenue 12,187 8,919 3,268 36.6 % Franchisee national advertising fund contributions 1,711 1,124 587 52.2 % Licensing and other revenue 4,672 1,650
3,022 183.2 %
Total revenue $ 206,442 $ 121,237 $ 85,205 70.3 %
The increase of $85.2 million in year-over-year restaurant sales for the year
ended January 2, 2022 , as compared to the year ended January 3, 2021 , was
primarily a result of the acquisition of the Village Inn and Bakers Square
brands, four Famous Dave's restaurants and the Tahoe Joe's Steakhouse brand.
Same store net sales for Company-owned restaurants for fiscal year 2021,
increased by 36.7% compared to fiscal year 2020. It is our policy to include in
our same store net sales base, restaurants that have been open for 12 months
under our company's ownership. On a weighted basis, for the year ended January
2, 2022 , dine-in same store sales increased by 63.0%, to-go sales
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increased by 5.9%, and catering sales increase 92.4%. Increases in same store sales were driven by the reduction of COVID-19 related dining and large-group gathering restrictions, as well as the increase in third-party delivery sales and curbside pickup options. We have been making significant investments in programs aimed at increasing to-go and catering sales at all of ourBBQ Holdings restaurants. We have rolled out delivery programs with various third-party services, which we believe, along with online ordering, will continue to augment our to-go and catering sales in the future. We believe our focus on to-go enables us to capture a greater portion of the "take-out" market by allowing consumers to "trade within our brands," when dining-in is not always an option. We believe that these innovations will provide additional avenues for our franchisees to grow their respective businesses. The increase in year-over-year franchise-related revenue was primarily due to the addition of theVillage Inn franchisee locations and the increased revenue at our franchise locations due to the lifting of COVID-19 related dining restrictions which were in place much of fiscal year 2020. Licensing and other revenue is primarily derived from retail sales of Famous Dave's branded sauces and rubs, Real Urban Barbeque consumer packaged goods, the sale of raw brewing products produced at theGranite City brewing facility, and the recognition of gift card breakage. The increase in licensing and other revenue in fiscal year 2021 is primarily attributable to an increase in gift card breakage.
Food and Beverage Costs
Our food and beverage costs consisted of the following for fiscal years ended
Year Ended
(dollars in thousands) January 2, 2022 January 3, 2021 $ Change % Change Food and beverage costs $ 55,969 $ 33,867$ 22,102 65.3 % Food and beverage costs for the fiscal years endedJanuary 2, 2022 andJanuary 3, 2021 represented approximately 29.8% and 30.9% of net restaurant sales, respectively. This year-over-year decrease, as a percentage of net restaurant sales was a result of the full-year impact of a reduction of menu items offered as the restaurants reacted to the increase in to-go business and limited in-store dining due to COVID-19 restrictions, and the improvement of operating efficiencies in general. The addition of theVillage Inn restaurants, which historically have run lower food cost than that of the otherBBQ Holdings' brands, also reduced the food costs as a percent of revenue in the later part of fiscal year 2021. Labor and Benefits Costs
Our labor and benefits costs consisted of the following for the fiscal years
ended
Year Ended
(dollars in thousands)
% Change
Labor and benefits costs $ 59,297 $ 37,228 $ 22,069 59.3 %
Labor and benefits costs for the fiscal years ended January 2, 2022 and January
3, 2021 were approximately 31.6% and 34.0% of net restaurant sales,
respectively. The year-over-year decrease during the year ended January 2, 2022 ,
as a percentage of net restaurant sales, was driven in part by a concerted
effort by management to increase efficiency at the restaurants and in part by
leveraging the increase in same store sales.
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Operating Expenses
Our operating expenses consisted of the following for the fiscal years ended
Year Ended
(dollars in thousands) January 2, 2022 January 3, 2021 $ Change % Change Operating expenses $ 55,223 $ 36,984$ 18,239 49.3 % Operating expenses for the fiscal years endedJanuary 2, 2022 andJanuary 3, 2021 were approximately 29.4% and 33.8% of net restaurant sales, respectively. This year over year decrease in expense as a percentage of net restaurant sales was due primarily to leverage on our fixed operating costs from the increased revenue resulting from the reduction of dine-in restrictions and restrictions on large gatherings which were put in place in 2020 due to COVID-19 concerns.
Depreciation and Amortization
Depreciation and amortization expense for the fiscal years endedJanuary 2, 2022 andJanuary 3, 2021 was approximately$7.4 million and$5.1 million , respectively, representing approximately 3.6% and 4.2% of total revenues, respectively. Depreciation and amortization expense increased during the year endedJanuary 2, 2022 primarily as a result of the addition of Company-owned restaurants.
General and Administrative Expenses
Our general and administrative expenses consisted of the following for the
fiscal years presented:
Year Ended
(dollars in thousands) January 2, 2022 January 3, 2021 $ Change % ChangeGeneral and administrative expenses $ 19,176 $ 14,195
General and administrative expenses for the years endedJanuary 2, 2022 andJanuary 3, 2021 , represented approximately 9.3% and 11.7% of total revenues, respectively. While we incurred additional expenditure for acquisition costs and ongoing oversite of our new restaurants, general and administrative expenses decreased as a percentage of revenue in fiscal year 2021 due primarily to the increase in total revenue.
Asset Impairment, Estimated Lease Termination and Other Closing Costs
The following is a summary of the asset impairment, estimated lease termination and other closing costs we incurred for the periods presented:
Year Ended
(dollars in thousands) January 2, 2022 January 3, 2021
Asset impairments, net $ - $ 5,532Lease termination and restaurant closure expenses 116 151 Asset impairment, estimated lease termination $ 116 $ 5,683
charges and other closing costs
In fiscal year 2020, we closed five Company-owned stores and impaired the assets
of four under-performing locations. These charges represented the write-offs of
the impaired assets and assets of the closed restaurants, related lease
termination, and costs incurred in facilitating the closure of such restaurants.
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Total Other Income
Total other income was$16.7 million and$12.6 million for the fiscal years endedJanuary 2, 2022 andJanuary 3, 2021 , respectively. Other income for the fiscal year endedJanuary 2, 2022 , included a$14.1 million gain related to the forgiveness of debt and interest of the PPP Loans we obtained as a result of the effects of COVID-19 on our business (Note 8 Long-term Debt) and a gain on bargain purchase in conjunction with the acquisition of theVillage Inn andBakers Square restaurants in the amount of$3.0 million . Other income for the fiscal year endedJanuary 3, 2021 , included a gain on bargain purchase of$13.2 million in conjunction with the acquisition of theGranite City restaurants (Note 2 Restaurant Acquisitions).
Income Tax (Expense) Benefit
We had income tax expense of$661,000 for the year endedJanuary 2, 2022 , and income tax benefit of$2.8 million for the year endedJanuary 3, 2021 . This represents an effective tax rate of 2.60% and (132.7)%, respectively. The decrease in our effective tax rate from the federal and state statutory rates primarily relates to the bargain purchase gains recognized on theVillage Inn andBakers Square acquisition in fiscal 2021 and theGranite City acquisition in fiscal 2020. In addition, our effective tax rate was further decreased in fiscal 2021 due to the gain on the forgiveness of our PPP loans.
Financial Condition, Liquidity and Capital Resources
Our balance of cash and cash equivalents was approximately$41.5 million and$19.6 million atJanuary 2, 2022 andJanuary 3, 2021 , respectively. We generated approximately$24.9 million in cash flows from operating activities. We received approximately$12.4 million in net proceeds from the sale of 1,000,000 shares of our common stock to accredited investors (Note 11 Shareholders' Equity) and$6.4 million in proceeds from our debt agreement with JPMorgan Chase, net of repayment of our debt withChoice Financial Group (Note 8 Long-Term Debt). We used approximately$18.8 million in cash for the acquisition of theVillage Inn and Bakers Square brands, four Famous Dave's restaurants, and theTahoe Joe's Steakhouse brand (Note 2 Restaurant Acquisitions). We expect to utilize cash on hand to reinvest in our brands and the evolution of our company. Our current ratio, which measures our immediate short-term liquidity, was 1.1 atJanuary 2, 2022 andJanuary 3, 2021 . The current ratio is computed by dividing total current assets by total current liabilities.
Net cash provided by operating activities increased to approximately
The approximately$24.9 million in net cash provided by operating activities in fiscal year 2021, reflects net income of approximately$24.4 million decreased primarily by$14.1 million related to the forgiveness of our PPP loans and the related accrued interest,$3.0 million related to the bargain purchase gain resulting from the acquisition of theVillage Inn andBakers Square restaurants, and an increase in prepaid expenses and receivables of$4.6 million . Such amount was increased in part by$7.4 million of depreciation and amortization,$7.0 million in gift card and other liabilities and$4.7 million of accrued compensation. Net cash provided by operating activities for the year endedJanuary 3, 2021 , was approximately$2.1 million , which reflects net income of approximately$4.3 million reduced primarily by the$13.2 million non-cash bargain purchase gain on the acquisition of theGranite City restaurants,$2.8 million of deferred taxes, and$2.1 million in gift card liability. Such amount was increased in part by$10.6 million of non-cash impairment/lease termination charges and depreciation expense.
Net cash used for investing activities for the years ended
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Net cash provided by financing activities in fiscal year 2021 was$16.3 million which was related to the proceeds from our loan with JPMorgan Chase and the proceeds from the sale of 1,000,000 shares of our common stock to accredited investors, offset in part by the payoff of our loan withChoice Bank . Net cash provided by financing activities in fiscal year 2020 was$17.4 million which was related primarily to the proceeds from our loan withChoice Bank and the proceeds from our PPP Loans.
We are subject to various financial and non-financial covenants on our long-term
debt, including a fixed charge coverage ratio and a rent adjusted leverage
ratio. As of
Contractual Obligations
The following is a summary of our contractual obligations as ofJanuary 2, 2022 : (in thousands) Total 2022 2023 2024 2025 2026 Thereafter Term Loan$ 15,000 $ 1,594 $ 1,500 $ 1,125 $ 1,594 $ 9,187 $ - Finance Lease Obligations 106 27 28 27 14 10 - Operating Lease Obligations 109,302 15,857 15,274 14,142 13,202 11,601 39,226 Total$ 124,408 $ 17,478 $ 16,802 $ 15,294 $ 14,810 $ 20,798 $ 39,226
Off-Balance Sheet Arrangements
Our company does not have any off-balance sheet arrangements (as such term is defined in Item 303 of regulation S-K) that are reasonably likely to have a current or future effect on our financial condition or changes in financial condition, operating results, or liquidity.
Income Taxes
As ofJanuary 2, 2022 , we had cumulative state net operating loss carry-forwards for tax reporting purposes of approximately$22.6 million and federal net operating loss carry-forwards for tax reporting purposes of$3.7 million which, if not used, have begun or will begin to expire in fiscal 2021 and 2038, respectively. Due tax law changes inDecember 2017 , net interest expense deductions are limited to 30% of adjusted taxable income and the net operating loss deduction is limited to 80% of taxable income. With the enactment of the Coronavirus Aid, Relief, and Economic Security ("CARES") legislation, the net interest expense limitation increased from 30% to 50% for 2019 and 2020. If we fail to generate significant taxable income, we may not be able to fully deduct the interest expense on our debt, which could result in us having to pay increased federal income taxes. We have also generated substantial taxable losses in the past and may continue to do so in the future. Although the treatment of tax losses generated beforeDecember 31, 2017 has not changed, subsequent tax losses generated will only be able to offset 80% of taxable income, although the losses may be carried forward indefinitely. Furthermore, although we have significant general business credit carryforwards, these carryforwards can only offset$25,000 of federal income tax plus 75% of the federal income tax liability over$25,000 . As such, we may have to pay federal income taxes in the future despite having significant net operating loss and general business credit carryforwards for federal income tax purposes.
Recent Accounting Guidance Not Yet Adopted
We reviewed all recently issued accounting pronouncements and concluded they
were either not applicable or not expected to have a significant impact on our
consolidated financial statements.
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Inflation
The primary inflationary factors affecting our operations include food, beverage
and labor costs. In addition, our leases require us to pay taxes, maintenance,
repairs and utilities and these costs are subject to inflationary increases. In
some cases, some of our lease commitments are tied to consumer price index
("CPI") increases. We are also subject to interest rate changes based on market
conditions.
Currently, we are operating in a period of increased inflation, led by commodity
cost inflation which primarily relates to proteins. This is due in part to
increased costs incurred by our suppliers related to higher labor,
transportation, packaging, and raw materials costs. While we have taken steps to
enter into agreements for some of the commodities used in our restaurant
operations, there can be no assurance that future supplies and costs for such
commodities will not fluctuate due to weather or other market conditions outside
of our control. Many of our restaurant employees are paid hourly rates subject
to the federal, state or local minimum wage requirements. Numerous state and
local governments have their own minimum wage and other regulatory requirements
for employees that are generally greater than the federal minimum wage and are
subject to annual increases based on changes in their local consumer price
indices. Additionally, certain operating and other costs, including health
benefits in compliance with the Patient Protection and Affordable Care Act,
taxes, insurance, COVID-19 pandemic related benefits, and other outside services
continue to increase with the general level of inflation and may also be subject
to other cost and supply fluctuations outside of our control. While we have been
able to partially offset inflation and other changes in the costs of key
operating resources by adjusting menu prices, coupled with more efficient
purchasing practices, productivity improvements and greater economies of scale,
there can be no assurance that we will be able to continue to do so in the
future. At times, competitive conditions and macroeconomic conditions that
impact consumer discretionary spending may limit our menu pricing flexibility.
There can be no assurance that we will continue to generate increases in
comparable restaurant sales in amounts sufficient to offset inflationary or
other cost pressures. Whether we are able and/or choose to continue to offset
the effects of inflation will determine to what extent, if any, inflation
affects our restaurant profitability in future periods.
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