Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Statement Concerning Forward-Looking Statements
This report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements because they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations
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concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those that we expected.
While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this report in the context of the factors that could cause outcomes to differ materially from our expectations. These factors include, but are not limited to:
● the impacts of the COVID-19 pandemic on our company, our employees, our customers, our partners, our industry and the economy as a whole, as well as our franchisees’ ability to maintain operations in their individual restaurants;
● our ability to open new restaurants in new and existing markets, including difficulty in finding sites and in negotiating acceptable leases;
● our ability to compete successfully with other quick-service and fast casual restaurants;
● vulnerability to changes in consumer preferences and economic conditions;
● vulnerability to political and social factors, including regarding trade, immigration or customer preferences;
● vulnerability to conditions in the greater Los Angeles area;
● vulnerability to natural disasters given the geographic concentration and real estate intensive nature of our business;
● the possibility that we may continue to incur significant impairment of certain of our assets, in particular in our new markets;
● changes to food and supply costs, especially for chicken;
● social media and negative publicity, whether or not valid, and our ability to respond to and effectively manage the accelerated impact of social media;
● our ability to continue to expand our digital business, delivery orders and catering;
● concerns about food safety and quality and about food-borne illness, particularly avian flu;
● dependence on frequent and timely deliveries of food and supplies and our dependence on a single supplier to distribute substantially all of our products to our restaurants;
● our ability to service our level of indebtedness;
● uncertainty related to the success of our marketing programs, new menu items, advertising campaigns and restaurant designs and remodels;
● our reliance on our franchisees, who may incur financial hardships, lose access to credit, close restaurants, or declare bankruptcy, and our limited control over our franchisees and potential liability for their acts;
● potential exposure to unexpected costs and losses from our self-insurance programs;
● potential obligations under long-term and non-cancelable leases, and our ability to renew leases at the end of their terms;
● the impact of any failure of our information technology system or any breach of our network security;
● the impact of any security breaches of confidential customer data or personal information in connection with our electronic process of credit and debit card transactions;
● our ability to enforce and maintain our trademarks and protect our other proprietary intellectual property;
● risks related to government regulation and litigation, including employment and labor laws; and
● other risks set forth in our filings with the SEC from time to time, including under Item 1A, Risk Factors in our annual report on Form 10-K for the year ended December 30, 2020, which filings are available online at www.sec.gov .
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences we anticipate or affect us or our operations in the ways that we expect. The forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
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Overview
El Pollo Loco is a differentiated and growing restaurant concept that specializes in fire-grilling citrus-marinated chicken and operates in the limited service restaurant (“LSR”) segment. We strive to offer food that integrates the culinary traditions of Mexico with the healthier lifestyle of Los Angeles, a combination that we call “LA-Mex.” Our distinctive menu features our signature product--citrus-marinated fire-grilled chicken--and a variety of Mexican and LA-inspired entrees that we create from our chicken. We serve individual and family-sized chicken meals, a variety of Mexican and LA-inspired entrees, and sides, and, throughout the year, on a limited-time basis, additional proteins like shrimp. Our entrees include favorites such as our Chicken Avocado Burrito, Pollo Fit entrees, chicken tostada salads, and Pollo Bowls. Our famous Creamy Cilantro dressings and salsas are prepared fresh daily, allowing our customers to create their favorite flavor profiles to enhance their culinary experience. Our distinctive menu with better for you and more affordable alternatives appeals to consumers across a wide variety of socio-economic backgrounds and drives our balanced composition of sales throughout the day (our “day-part mix”), including at lunch and dinner.
COVID-19 Impact
During the COVID-19 pandemic, we have experienced periods of significant disruption to our restaurant operations. Following the pandemic declaration in March 2020, federal, state and local governments have periodically responded to the public health crisis by requiring social distancing, issuing “stay at home” directives, and implementing restaurant restrictions - including government-mandated dining room closures - that limited business to off-premise services only (take-out, drive-thru and delivery). Many state and local governments continue to periodically implement certain restrictions to try and contain the spread of the virus. As of September 29, 2021, all of our restaurants have dining rooms open at full capacity and continue to maintain take-away, mobile pick-up, delivery, and drive-thru operations where available. We continue to experience staffing challenges which resulted in reduced operating hours and service channels. Further, there have been inflationary pressures due to supply chain disruptions that have impacted our business and results of operations during the thirteen and thirty-nine weeks ended September 29, 2021 .
During the thirteen and thirty-nine weeks ended September 29, 2021, we incurred $0.5 million and $3.5 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay. During the thirteen and thirty-nine weeks ended September 23, 2020, the Company incurred $0.9 million and $ 2.0 million, respectively, in COVID-19 related expenses, primarily due to leaves of absence and overtime pay.
Growth Strategies and Outlook
As of September 29, 2021, we had 480 locations in six states. In fiscal 2020, we opened one new company-operated restaurant in Nevada, which was in process prior to the COVID-19 pandemic and our franchisees opened three new restaurants, two in California and one in Arizona. For the thirty-nine weeks ended September 29, 2021, two new company-operated restaurants were opened, one in Nevada and one in California, and no new franchised restaurants were opened, although we sold eight of our company-owned restaurants to a franchisee during the thirteen and thirty-six weeks ended September 29, 2021.
We plan to continue to expand our business, drive restaurant sales growth, and enhance our competitive positioning, by executing the following strategies:
● expand our restaurant base;
● increase our comparable restaurant sales; and
● enhance operations and leverage our infrastructure.
To increase comparable restaurant sales, we plan to increase customer frequency, attract new customers, and improve per-person spend. Success of these growth plans is not guaranteed.
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Highlights and Trends
Comparable Restaurant Sales
For the thirteen and thirty-nine weeks ended September 29, 2021, system-wide comparable restaurant sales increased by 9.3% and 12.5%, respectively, from the comparable period in the prior year. For company-operated restaurants, comparable restaurant sales for the thirteen and thirty-nine weeks ended September 29, 2021 increased by 4.8% and 8.1%, respectively. For company-operated restaurants, the quarter’s change in comparable restaurant sales consisted of an approximately 3.5% increase in average check size and an increase in transactions of 1.2% and the year-to-date change in comparable restaurant sales consisted of a 6.6% increase in average check size and a 1.4% increase in transactions . For franchised restaurants, comparable restaurant sales increased 12.6% and 15.7% for the thirteen and thirty-nine weeks ended September 29, 2021, respectively. Refer to Comparable Restaurant Sales definition in “Key Performance Indicators” section below.
Restaurant Development
Our restaurant counts at the beginning and end of each of the last three fiscal years and the thirty-nine weeks ended September 29, 2021, were as follows:
Thirty-Nine Weeks Ended
Fiscal Year Ended
September 29, 2021
2020
2019
2018
Company-operated restaurant activity:
Beginning of period
196
195
213
212
Openings
2
1
2
8
Restaurant sale to franchisee
(8)
—
(16)
—
Closures
—
—
(4)
(7)
Restaurants at end of period
190
196
195
213
Franchised restaurant activity:
Beginning of period
283
287
271
265
Openings
—
3
2
9
Restaurant sale to franchisee
8
—
16
—
Closures
(1)
(7)
(2)
(3)
Restaurants at end of period
290
283
287
271
System-wide restaurant activity:
Beginning of period
479
482
484
477
Openings
2
4
4
17
Closures
(1)
(7)
(6)
(10)
Restaurants at end of period
480
479
482
484
Restaurant Remodeling
In 2020, we finalized a new restaurant design that we believe will clearly differentiate and communicate our brand, both on the exterior and interior. We believe that our remodels using this new design will result in higher restaurant revenue and a strengthened brand. As of September 29, 2021 we have completed 12 remodels using the new asset design including 10 this year. In fiscal 2021, we plan to complete a total of 10-12 company and 5-7 franchise remodels using the new design.
Loco Rewards
During the second quarter of 2017, we introduced a new loyalty rewards points program in an effort to increase sales and loyalty among our customers, by offering rewards that incentivize customers to visit our restaurants more often each month. Customers earn points for each dollar spent and as of August 4, 2020, 50 points can be redeemed for a $5 reward to be used for a future purchase. Prior to August 4, 2020, 100 points could be redeemed for a $10 reward. If a customer does not earn or use points within a one-year period, their account is deactivated and all points expire. Additionally, if a reward is not used within six months, it expires. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points is deemed to have
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been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are transferred to a reward and redeemed, the reward or points have expired, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points on a pro-rata basis, based on stand-alone selling price, as determined by menu pricing and loyalty point’s terms.
In addition, customers can earn additional points and free entrées for a variety of engagement activities. As points are available for redemption past the quarter earned, a portion of the revenue associated with the earned points will be deferred until redemption or expiration. As of September 29, 2021 and December 30, 2020, the revenue allocated to loyalty points that had not been redeemed was $0.7 million and $0.9 million, respectively, which is reflected in the Company’s accompanying condensed consolidated balance sheets within other accrued expenses and current liabilities. The Company had over 2.5 million loyalty program members as of September 29, 2021.
Critical Accounting Policies and Use of Estimates
The preparation of our condensed consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue, and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances in making judgments about the carrying value of assets and liabilities that are not readily available from other sources. We evaluate our estimates on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions.
Accounting policies are an integral part of our condensed consolidated financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. Management believes that the critical accounting policies and estimates discussed below involve the most difficult management judgments, due to the sensitivity of the methods and assumptions used. For a summary of our critical accounting policies and a discussion of our use of estimates, see “Critical Accounting Policies and Use of Estimates” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 30, 2020.
There have been no material changes to our critical accounting policies or uses of estimates since our annual report on Form 10-K.
Recent Accounting Pronouncements
Recent accounting pronouncements are described in Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” in the Notes to Condensed Consolidated Financial Statements above.
Key Financial Definitions
Revenue
Our revenue is derived from three primary sources: company-operated restaurant revenue, franchise revenue, which is comprised primarily of franchise royalties and, to a lesser extent, franchise fees and sublease rental income, and franchise advertising fee revenue. See Note 10, “Revenue from Contracts with Customers” in the Notes to Condensed Consolidated Financial Statements above for further details regarding our revenue recognition policy.
Food and Paper Costs
Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of food and paper costs are variable in nature, change with sales volume, are impacted by menu mix, and are subject to increases or decreases in commodity costs.
Labor and Related Expenses
Labor and related expenses include wages, payroll taxes, workers’ compensation expense, benefits, and bonuses paid to our restaurant management teams. Like other expense items, we expect labor costs to grow proportionately as our
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restaurant revenue grows. Factors that influence labor costs include minimum wage and payroll tax legislation, overtime, the frequency and severity of workers’ compensation claims, health care costs, and the performance of our restaurants.
Occupancy Costs and Other Operating Expenses
Occupancy costs include rent, CAM, and real estate taxes. Other restaurant operating expenses include the costs of utilities, advertising, credit card processing fees, restaurant supplies, repairs and maintenance, and other restaurant operating costs.
General and Administrative Expenses
General and administrative expenses are comprised of expenses associated with corporate and administrative functions that support the development and operations of our restaurants, including compensation and benefits, travel expenses, stock compensation costs, legal and professional fees, and other related corporate costs. Also included are pre-opening costs, and expenses above the restaurant level, including salaries for field management, such as area and regional managers, and franchise field operational support.
Legal Settlements
Legal settlements include expenses such as judgments or settlements related to legal matters, legal claims and class action lawsuits.
Franchise Expenses
Franchise expenses are primarily comprised of rent expenses incurred on properties leased by us and then sublet to franchisees, expenses incurred in support of franchisee information technology systems, and the franchisee’s portion of advertising expenses.
Depreciation and Amortization
Depreciation and amortization primarily consists of the depreciation of property and equipment, including leasehold improvements and equipment.
Loss on Disposal of Assets
Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.
Impairment and Closed-Store Reserves
We review long-lived assets such as property, equipment, and intangibles on a unit-by-unit basis for impairment when events or circumstances indicate a carrying value of the assets that may not be recoverable. We determine if there is impairment at the restaurant level by comparing undiscounted future cash flows from the related long-lived assets to their respective carrying values and record an impairment charge when appropriate. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term, including sales trends, labor rates, commodity costs and other operating cost assumptions. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value. This process of assessing fair values requires the use of estimates and assumptions, including our ability to sell or reuse the related assets and market conditions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets and these charges could be material.
When the Company closes a restaurant, it will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense, in addition to property tax and CAM charges for closed restaurants.
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Interest Expense, Net
Interest expense, net, consists primarily of interest on our outstanding debt. Debt issuance costs are amortized at cost over the life of the related debt.
Provision for Income Taxes
Provision for income taxes consists of federal and state taxes on our income.
Comparison of Results of Operations
Our operating results for the thirteen and thirty-nine weeks ended September 29, 2021 and September 23, 2020 and expressed as percentages of total revenue, with the exception of cost of operations and company restaurant expenses, which are expressed as a percentage of company-operated restaurant revenue, are compared in the tables below.
Thirteen Weeks Ended
September 29, 2021
September 23, 2020
Increase / (Decrease)
($,000)
(%)
($,000)
(%)
($,000)
(%)
Statements of Income Data
Company-operated restaurant revenue
$
99,986
86.4
$
97,276
87.7
$
2,710
2.8
Franchise revenue
8,918
7.7
7,781
7.0
1,137
14.6
Franchise advertising fee revenue
6,796
5.9
5,922
5.3
874
14.8
Total revenue
115,700
100.0
110,979
100.0
4,721
4.3
Cost of operations
Food and paper costs (1)
26,698
26.7
24,922
25.6
1,776
7.1
Labor and related expenses (1)
27,802
27.8
28,756
29.6
(954)
(3.3)
Occupancy and other operating expenses (1)
25,108
25.1
23,836
24.5
1,272
5.3
Gain on recovery of insurance proceeds, lost profits (1)
—
—
(2,000)
(2.1)
2,000
N/A
Company restaurant expenses (1)
79,608
79.6
75,514
77.6
4,094
5.4
General and administrative expenses
9,357
8.1
9,803
8.8
(446)
(4.5)
Franchise expenses
8,545
7.4
7,572
6.8
973
12.8
Depreciation and amortization
3,685
3.2
4,092
3.7
(407)
(9.9)
Loss on disposal of assets
83
0.1
29
0.0
54
186.2
Loss on disposition of restaurants
10
0.0
—
—
10
N/A
Impairment and closed-store reserves
167
0.1
1,776
1.6
(1,609)
(90.6)
Total expenses
101,455
87.7
98,786
89.0
2,669
2.7
Income from operations
14,245
12.3
12,193
11.0
2,052
16.8
Interest expense, net of interest income
449
0.4
770
0.7
(321)
(41.7)
Income tax receivable agreement expense (income)
(19)
(0.0)
(144)
(0.1)
125
(86.8)
Income before provision for income taxes
13,815
11.9
11,567
10.4
2,248
19.4
Provision for income taxes
3,654
3.2
1,647
1.5
2,007
121.9
Net income
$
10,161
8.7
$
9,920
8.9
$
241
2.4
(1) Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator. All other percentages use total revenue.
Thirty-Nine Weeks Ended
September 29, 2021
September 23, 2020
Increase / (Decrease)
($,000)
(%)
($,000)
(%)
($,000)
(%)
Statements of Income Data
Company-operated restaurant revenue
$
301,117
87.2
$
277,617
87.9
$
23,500
8.5
Franchise revenue
24,919
7.2
21,562
6.8
3,357
15.6
Franchise advertising fee revenue
19,370
5.6
16,567
5.3
2,803
16.9
Total revenue
345,406
100.0
315,746
100.0
29,660
9.4
Cost of operations
Food and paper costs (1)
78,971
26.2
73,357
26.4
5,614
7.7
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Labor and related expenses (1)
90,060
29.9
83,208
30.0
6,852
8.2
Occupancy and other operating expenses (1)
74,288
24.7
67,867
24.4
6,421
9.5
Gain on recovery of insurance proceeds, lost profits(1)
—
—
(2,000)
(0.7)
2,000
N/A
Company restaurant expenses (1)
243,319
80.8
222,432
80.1
20,887
9.4
General and administrative expenses
30,354
8.8
29,599
9.4
755
2.6
Franchise expenses
24,457
7.1
21,110
6.7
3,347
15.9
Depreciation and amortization
11,540
3.3
12,629
4.0
(1,089)
(8.6)
Loss on disposal of assets
194
0.1
156
—
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24.4
Recovery of securities lawsuits related legal expenses and other insurance claims
—
—
(123)
—
123
(100.0)
Loss on disposition of restaurants
1,534
0.4
—
—
1,534
N/A
Impairment and closed-store reserves
1,091
0.3
4,615
1.5
(3,524)
(76.4)
Total expenses
312,489
90.5
290,418
92.0
22,071
7.6
Income from operations
32,917
9.5
25,328
8.0
7,589
30.0
Interest expense, net of interest income
1,399
0.4
2,583
0.8
(1,184)
(45.8)
Income tax receivable agreement (income) expense
(69)
(0.0)
26
—
(95)
(365.4)
Income before provision for income taxes
31,587
9.1
22,719
7.2
8,868
39.0
Provision for income taxes
8,644
2.5
3,700
1.2
4,944
133.6
Net income
$
22,943
6.6
$
19,019
6.0
$
3,924
20.6
(1) Percentages for line items relating to cost of operations and company restaurant expenses are calculated with company-operated restaurant revenue as the denominator. All other percentages use total revenue.
Company-Operated Restaurant Revenue
For the quarter, company-operated restaurant revenue increased $2.7 million, or 2.8%, from the comparable period in the prior year. The increase in company-operated restaurant sales was primarily due to an increase in company-operated comparable restaurant revenue of $4.4 million, or 4.8%. The company-operated comparable restaurant sales increase consisted of an approximately 3.5% increase in average check size and a 1.2% increase in transactions. In addition, company-operated restaurant revenue was favorably impacted by $0.9 million of additional sales from restaurants opened during or after the third quarter of the prior year and a $0.4 million increase in revenue from restaurants that were temporarily closed due to the COVID-19 pandemic during the third quarter of the prior year. This restaurant sales increase was partially offset by a $2.6 million decrease in revenue from the eight company-operated restaurants sold by the Company to an existing franchisee during the quarter and a $0.4 million decrease in revenue recognized for our loyalty points program.
Year-to-date, company-operated restaurant revenue increased $23.5 million, or 8.5%, from the comparable period in the prior year. The increase in company-operated restaurant sales was primarily due to a $23.5 million, or 8.1% increase in company-operated comparable restaurant revenue. In addition, company-operated restaurant revenue was favorably impacted by $2.7 million of additional sales from restaurants opened during or after the second quarter of the prior year and a $0.4 million increase in revenue from restaurants that were temporarily closed due to the COVID-19 pandemic during the year-to-date period of the prior year. The company-operated comparable restaurant sales increase consisted of an approximately 6.6% increase in average check size and a 1.4% increase in transactions. This restaurant sales increase was partially offset by a $2.6 million decrease in revenue from the eight company-operated restaurants sold by the Company to an existing franchisee during the quarter and a $0.5 million decrease in revenue recognized for our loyalty points program. See above under “COVID-19 Impact” for additional information related to the impact of the COVID-19 pandemic on our business.
Franchise Revenue
For the quarter, franchise revenue increased $1.1 million, or 14.6%, from the comparable period in the prior year. This increase was primarily due to a franchise comparable restaurant sales increase of 12.6%, the opening of one restaurant during or subsequent to the third quarter of 2020 and revenue generated from eight company-operated restaurants sold by the Company to an existing franchisee during the quarter. This franchise revenue increase was partially offset by the closure of two franchise locations during or subsequent to the third quarter of 2020.
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Year-to-date, franchise revenue increased $3.4 million, or 15.6%, from the comparable period in the prior year. This increase was primarily due to a franchise comparable restaurant sales increase of 15.7%, the opening of three restaurants during or subsequent to the first quarter of 2020 and revenue generated from eight company-operated restaurants sold by the Company to an existing franchisee during the quarter . This franchise revenue increase was partially offset by the closure of eight franchise locations during or subsequent to the first quarter of 2020.
Franchise Advertising Fee Revenue
For the quarter, franchise advertising fee revenue increased $0.9 million, or 14.8%, from the comparable period in the prior year. Year-to-date, franchise advertising fee revenue increased $2.8 million, or 16.9%, from the comparable period in the prior year. As advertising fee revenue is a percentage of franchisees’ revenue, the quarter and year-to-date fluctuations were due to the increases and decreases noted in franchise revenue above.
Food and Paper Costs
For the quarter, food and paper costs increased $1.8 million, or 7.1%, from the comparable period in the prior year, primarily due to a $1.0 million increase in food costs and a $0.8 million increase in paper costs. Year-to-date, food and paper costs increased $5.6 million, or 7.7%, from the comparable period in the prior year, due to a $3.4 million increase in food costs and a $2.2 million increase in paper costs. The increase in food and paper costs for the quarter and year-to-date periods resulted primarily from higher company transactions, sales mix and commodity inflation. For the quarter, food and paper costs as a percentage of company-operated restaurant revenue were 26.7%, up from 25.6% in the comparable period of the prior year primarily due to commodity inflation and investment in new elevated packaging, partially offset by an increase in pricing. Year-to-date, food and paper costs as a percentage of company-operated restaurant revenue were 26.2%, down from 26.4% in the comparable period of the prior year. The percentage decrease for the year-to-date period was due primarily to an increase in pricing and effective waste management, partially offset by sales mix and commodity inflation.
Labor and Related Expenses
For the quarter, labor and related expenses decreased $1.0 million, or 3.3%, from the comparable period in the prior year. The decrease for the quarter was pr imarily due to recognizing a $3.2 million ERC which was recorded as an offset to the corresponding payroll tax expense and was classified as part of the labor and other operating expenses on the condensed consolidated statements of income during the thirteen weeks ended September 29, 2021. See Note 1, “Basis of Presentation and Summary of Significant Accounting Policies” in the Notes to Condensed Consolidated Financial Statements ” for add itional information related to the ERC. Additionally, the labor and related expenses were favorably impacted by a $0.9 million reduction in labor related to the eight locations sold to an existing franchisee during the quarter. The decrease in labor and related expenses was partially offset by a $1.5 million increase primarily related to minimum wage increases in California during fiscal 2020 and 2021 and other labor wage increases as a result of competitive pressure, a $0.8 million increase related to the 1.2% increase in year-over-year sales transactions, a $0.3 million increase in overtime, a $0.3 million increase in medical and workers compensation expense due to higher claims activity and a $0.2 million increase in other labor related expenses.
Year-to-date, labor and related expenses increased $6.9 million, or 8.2%, from the comparable period in the prior year. The increase for the year-to-date period was due to a $2.6 million increase primarily related to minimum wage increases in California during fiscal 2020 and 2021 and other labor wage increases as a result of competitive pressure, a $2.5 million increase in overtime, a $2.3 million increase related to the 1.4% increase in year-over-year sales transactions, a $1.1 million increase primarily related to employee training and other labor related expenses, $0.9 million in labor costs associated with the COVID-19 pandemic and $0.7 million in higher payroll taxes. This labor and related expense increase was partially offset by recognizing a $3.2 million ERC which is recorded as an offset to the corresponding payroll tax expense and is classified as part of the labor and other operating expenses on the condensed consolidated statements of income during the thirty-nine weeks ended September 29, 2021.
For the quarter, labor and related expenses as a percentage of company-operated restaurant revenue were 27.8%, down from 29.6% in the comparable period in the prior year due to the cost increases highlighted above, partially offset by the obtained ERC. Year-to-date labor and related expenses as a percentage of company-operated restaurant revenue were 29.9%, compared to 30.0% in the comparable period in the prior year. The year-to-date percentage was impacted by the cost increases highlighted above, offset by an obtained ERC.
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Occupancy and Other Operating Expenses
For the quarter, occupancy and other operating expenses increased $1.3 million, or 5.3%, from the comparable period of the prior year. Fluctuations in occupancy and other expenses consisted primarily of a $0.5 million increase in utilities, a $0.4 million increase in other operating expenses, a $0.2 million increase in repairs and maintenance costs and a $0.2 million increase in market place delivery fees.
Year-to-date, occupancy and other operating expenses increased $6.4 million, or 9.5%, from the comparable period of the prior year. The increase was primarily due to a $1.2 million increase in utilities, a $1.1 million increase in market place delivery fees, a $1.0 million increase in advertising fees, a $0.9 million increase in repairs and maintenance costs, a $0.8 million increase in other operating expenses, a $0.6 million increase in operating supplies, a $0.4 million increase in occupancy costs, primarily related to rent expense and higher general liability claims, and a $0.4 million increase in credit card charges.
For the quarter, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 25.1%, up from 24.5% in the comparable period in the prior year. Year-to-date, occupancy and other operating expenses as a percentage of company-operated restaurant revenue were 24.7%, up from 24.4% in the comparable period of the prior year. The higher percentage on both a quarter and year-to-date basis reflects the cost increases noted above partially offset by higher year-to-date revenue.
General and Administrative Expenses
For the quarter, general and administrative expenses decreased $0.4 million, or 4.5%, from the comparable period in the prior year. The decrease for the quarter was due primarily to a $1.3 million decrease in labor related costs, primarily related to a decrease in estimated management bonus expense. This general and administrative expenses decrease was partially offset by a $0.6 million increase in recruiting and other outside services fees and a $0.3 million increase in legal and professional expenses.
Year-to-date, general and administrative expenses increased $0.8 million, or 2.6%, from the comparable period in the prior year. The increase for the year-to-date period was due primarily to a $1.2 million increase in recruiting and other outside services fees, a $0.8 million increase in stock compensation expenses and a $0.3 million increase in labor related costs, primarily related to an increase in management bonus expense . This increase was partially offset by a $1.5 million decrease in legal and professional expenses, related primarily to a $2.5 million legal settlement in the prior year period discussed in Note 7, “Commitments and Contingencies, Legal Matters” in the Notes to Condensed Consolidated Financial Statements above.
For the quarter, general and administrative expenses as a percentage of total revenue were 8.1%, down from 8.8% in the comparable period of the prior year. The percentage decrease for the quarterly period resulted primarily from higher revenue. Year-to-date, general and administrative expenses as a percentage of total revenue were 8.8%, down from 9.4% in the comparable period of the prior year. The year-to-date percentage decrease is primarily due to the higher revenue, partially offset by the cost increases discussed above.
Loss on Disposition of Restaurants
During the thirteen and thirty-nine weeks ended September 29, 2021, we completed the sale of our eight restaurants within Sacramento area to an existing franchisee. This sale resulted in cash proceeds of $4.6 million and a net loss on sale of restaurants of less than $0.1 million and $1.5 million for the thirteen and thirty-nine weeks ended September 29, 2021, respectively.
Impairment and Closed-Store Reserves
During the thirteen and thirty-nine weeks ended September 29, 2021, we recorded non-cash impairment charges of $0.1 million and $0.7 million, respectively, primarily related to the carrying value of the ROU assets of one restaurant in Texas closed in 2019, the ROU assets of one restaurant in California, and the long-lived assets of three restaurants in California. During the thirteen and thirty-nine weeks ended September 23, 2020, we recorded non-cash impairment charges of $1.5 million and $3.5 million, respectively, primarily related to the carrying value of the assets of one restaurant in Texas and the long-lived assets of four restaurants in California. Given the inherent uncertainty in
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projecting results for newer restaurants in newer markets, as well as the impact of the COVID-19 pandemic, the Company is monitoring the recoverability of the carrying value of the assets of several restaurants on an ongoing basis. For these restaurants, if expected performance is not realized, an impairment charge may be recognized in future periods, and such charge could be material.
When a restaurant is closed, we will evaluate the ROU asset for impairment, based on anticipated sublease recoveries. The remaining value of the ROU asset is amortized on a straight-line basis, with the expense recognized in closed-store reserve expense. Additionally, any property tax and CAM payments relating to closed restaurants are included within closed-store expense. During the thirteen and thirty-nine weeks ended September 29, 2021, we recognized $0.1 million and $0.4 million, respectively, of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations. During the thirteen and thirty-nine weeks ended September 23, 2020, we recognized $0.3 million and $1.1 million, respectively, of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.
Interest Expense, Net
For the quarter and year-to-date, interest expense, net, decreased $0.3 million and $1.2 million, respectively, from the comparable period in the prior year. The decrease is primarily related to lower interest rates and lower outstanding balances on our 2018 Revolver.
Income Tax Receivable Agreement
On July 30, 2014, we entered into the TRA. The TRA calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our NOLs and other tax attributes attributable to preceding periods. For both the thirteen and thirty-nine weeks ended September 29, 2021, we recorded income tax receivable agreement income of less than $0.1 million, and for the thirteen and thirty-nine weeks ended September 23, 2020 we recorded income tax receivable agreement income of $0.1 million and income tax receivable expense of less than $0.1 million, respectively.
Provision for Income Taxes
For the quarter ended September 29, 2021, we recorded an income tax provision of $3.7 million, reflecting an estimated effective tax rate of 26.4%. For the quarter ended September 23, 2020, we recorded an income tax provision of $1.6 million, reflecting an estimated effective tax rate of approximately 14.2%. For the year-to-date period ended September 29, 2021, we recorded an income tax provision of $8.7 million, reflecting an estimated effective tax rate of approximately 27.4%. For the year-to-date period ended September 23, 2020, we recorded an income tax provision of $3.7 million, reflecting an estimated effective tax rate of approximately 16.3%.
The difference between the 21.0% statutory rate and the Company’s effective tax rate of 27.4% for the year-to-date period ended September 29, 2021 is primarily a result of a windfall tax benefit related to stock options exercised, non-deductible executive compensation, state taxes, a Work Opportunity Tax Credit benefit, the change in valuation allowance against certain state credits and prior year true up related to stock based compensation.
Key Performance Indicators
To evaluate the performance of our business, we utilize a variety of financial and performance measures. These key measures include company-operated restaurant revenue, system-wide sales, comparable restaurant sales, restaurant contribution, restaurant contribution margin, new restaurant openings, EBITDA, and Adjusted EBITDA.
System-Wide Sales
System-wide sales are neither required by, nor presented in accordance with GAAP. System-wide sales are the sum of company-operated restaurant revenue and sales from franchised restaurants. Our total revenue in our consolidated statements of operations is limited to company-operated restaurant revenue and franchise revenue from our franchisees. Accordingly, system-wide sales should not be considered in isolation or as a substitute for our results as reported under GAAP. Management believes that system-wide sales are an important figure for investors, because they are widely used in the restaurant industry, including by our management, to evaluate brand scale and market penetration.
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The following table reconciles system-wide sales to company-operated restaurant revenue and total revenue:
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
September 29, 2021
September 23, 2020
September 29, 2021
September 23, 2020
Company-operated restaurant revenue
$
99,986
$
97,276
$
301,117
$
277,617
Franchise revenue
8,918
7,781
24,919
21,562
Franchise advertising fee revenue
6,796
5,922
19,370
16,567
Total Revenue
115,700
110,979
345,406
315,746
Franchise revenue
(8,918)
(7,781)
(24,919)
(21,562)
Franchise advertising fee revenue
(6,796)
(5,922)
(19,370)
(16,567)
Sales from franchised restaurants
151,657
132,334
432,752
370,454
System-wide sales
$
251,643
$
229,610
$
733,869
$
648,071
Company-Operated Restaurant Revenue
Company-operated restaurant revenue consists of sales of food and beverages in company-operated restaurants net of promotional allowances, employee meals, and other discounts. Company-operated restaurant revenue in any period is directly influenced by the number of operating weeks in such period, the number of open restaurants, and comparable restaurant sales.
Seasonal factors and the timing of holidays cause our revenue to fluctuate from quarter to quarter. Our revenue per restaurant is typically lower in the first and fourth quarters due to reduced January and December traffic and higher in the second and third quarters. As a result of seasonality, our quarterly and annual results of operations and key performance indicators such as company-operated restaurant revenue and comparable restaurant sales may fluctuate. In addition, we expect our quarterly company-operated restaurant revenue and comparable restaurant sales to continue to fluctuate significantly due to the current COVID-19 pandemic. See above under “COVID-19 Impact” for additional information related to the impact of the COVID-19 pandemic on our business.
Comparable Restaurant Sales
Comparable restaurant sales reflect year-over-year sales changes for comparable company-operated, franchised, and system-wide restaurants. A restaurant enters our comparable restaurant base the first full week after it has operated for fifteen months. Comparable restaurant sales exclude restaurants closed during the applicable period. At September 29, 2021 and September 23, 2020, there were 462 and 468 comparable restaurants, 189 and 191 company-operated restaurants and 273 and 277 franchised restaurants, respectively. Comparable restaurant sales indicate the performance of existing restaurants, since new restaurants are excluded.
Comparable restaurant sales growth can be generated by an increase in the number of meals sold and/or by increases in the average check amount, resulting from a shift in menu mix and/or higher prices resulting from new products or price increases.
Restaurant Contribution and Restaurant Contribution Margin
Restaurant contribution and restaurant contribution margin are neither required by, nor presented in accordance with, GAAP. Restaurant contribution is defined as company-operated restaurant revenue less company restaurant expenses which includes food and paper cost, labor and related expenses and occupancy and other operating expenses, where applicable. Restaurant contribution excludes certain costs, such as general and administrative expenses, depreciation and amortization, impairment and closed-store reserve and other costs that are considered normal operating costs and, accordingly, restaurant contribution is not indicative of overall Company results and does not accrue directly to the benefit of stockholders because of the exclusion of certain corporate-level expenses. Restaurant contribution margin is defined as restaurant contribution as a percentage of net company-operated restaurant revenue.
Restaurant contribution and restaurant contribution margin are supplemental measures of operating performance of our restaurants, and our calculations thereof may not be comparable to those reported by other companies. Restaurant contribution and restaurant contribution margin have limitations as analytical tools, and you should not consider them in isolation, or superior to, or as substitutes for the analysis of our results as reported under GAAP. Management uses restaurant contribution and restaurant contribution margin as key metrics to evaluate the profitability of incremental sales
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at our restaurants, to evaluate our restaurant performance across periods, and to evaluate our restaurant financial performance compared with our competitors. Management believes that restaurant contribution and restaurant contribution margin are important tools for investors, because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency, and performance. Restaurant contribution and restaurant contribution margin may also assist investors in evaluating our business and performance relative to industry peers and provide greater transparency with respect to the Company’s financial condition and results of operation.
A reconciliation of restaurant contribution and restaurant contribution margin to company-operated restaurant revenue is provided below:
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
(Dollar amounts in thousands)
September 29, 2021
September 23, 2020
September 29, 2021
September 23, 2020
Restaurant contribution:
Income from operations
$
14,245
$
12,193
$
32,917
$
25,328
Add (less):
General and administrative expenses
9,357
9,803
30,354
29,599
Franchise expenses
8,545
7,572
24,457
21,110
Depreciation and amortization
3,685
4,092
11,540
12,629
Loss on disposal of assets
83
29
194
156
Loss on disposition of restaurants
10
—
1,534
—
Franchise revenue
(8,918)
(7,781)
(24,919)
(21,562)
Franchise advertising fee revenue
(6,796)
(5,922)
(19,370)
(16,567)
Recovery of securities lawsuits related legal expenses and other insurance claims
—
—
—
(123)
Impairment and closed-store reserves
167
1,776
1,091
4,615
Restaurant contribution
$
20,378
$
21,762
$
57,798
$
55,185
Company-operated restaurant revenue:
Total revenue
$
115,700
$
110,979
$
345,406
$
315,746
Less:
Franchise revenue
(8,918)
(7,781)
(24,919)
(21,562)
Franchise advertising fee revenue
(6,796)
(5,922)
(19,370)
(16,567)
Company-operated restaurant revenue
$
99,986
$
97,276
$
301,117
$
277,617
Restaurant contribution margin (%)
20.4
%
22.4
%
19.2
%
19.9
%
New Restaurant Openings
The number of restaurant openings reflects the number of new restaurants opened by us and our franchisees during a particular reporting period. Before a new restaurant opens, we and our franchisees incur pre-opening costs, as described below. New restaurants often open with an initial start-up period of higher than normal sales volumes, which subsequently decrease to stabilized levels. New restaurants typically experience normal inefficiencies in the form of higher food and paper, labor, and other direct operating expenses and, as a result, restaurant contribution margins are generally lower during the start-up period of operation. The average start-up period after which our new restaurants’ revenue and expenses normalize is approximately fourteen weeks. When we enter new markets, we may be exposed to start-up times and restaurant contribution margins that are longer and lower than reflected in our average historical experience.
EBITDA and Adjusted EBITDA
EBITDA represents net income before interest expense, provision for income taxes, depreciation, and amortization. Adjusted EBITDA represents net income before interest expense, provision for income taxes, depreciation, amortization,
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and items that we do not consider representative of our on-going operating performance, as identified in the reconciliation table below.
EBITDA and Adjusted EBITDA as presented in this report are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income, or any other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity. In addition, in evaluating EBITDA and Adjusted EBITDA, you should be aware that in the future we will incur expenses or charges such as those added back to calculate EBITDA and Adjusted EBITDA. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.
EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are (i) they do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) they do not reflect changes in, or cash requirements for, our working capital needs, (iii) they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements, (v) they do not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, (vi) they do not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our on-going operations, and (vii) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.
We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.
We believe that EBITDA and Adjusted EBITDA facilitate operating performance comparisons from period to period by isolating the effects of some items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or NOL) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and Adjusted EBITDA because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use EBITDA and Adjusted EBITDA internally for a number of benchmarks including to compare our performance to that of our competitors.
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The following table sets forth reconciliations of our net income to our EBITDA and Adjusted EBITDA:
Thirteen Weeks Ended
Thirty-Nine Weeks Ended
(Amounts in thousands)
September 29, 2021
September 23, 2020
September 29, 2021
September 23, 2020
Net income
$
10,161
$
9,920
$
22,943
$
19,019
Non-GAAP adjustments:
Provision for income taxes
3,654
1,647
8,644
3,700
Interest expense, net of interest income
449
770
1,399
2,583
Depreciation and amortization
3,685
4,092
11,540
12,629
EBITDA
$
17,949
$
16,429
$
44,526
$
37,931
Stock-based compensation expense (a)
1,042
909
2,936
2,170
Loss on disposal of assets (b)
83
29
194
156
Loss on disposition of restaurants (c)
10
—
1,534
—
Recovery of securities lawsuits related legal expense and other insurance claims (d)
—
—
—
(123)
Impairment and closed-store reserves (e)
167
1,776
1,091
4,615
Income tax receivable agreement (income) expense (f)
(19)
(144)
(69)
26
Securities class action legal expense (g)
(415)
289
256
527
Legal settlements (h)
—
—
—
2,566
Pre-opening costs (i)
36
—
220
110
Adjusted EBITDA
$
18,853
$
19,288
$
50,688
$
47,978
(a) Includes non-cash, stock-based compensation.
(b) Loss on disposal of assets includes the loss on disposal of assets related to retirements and replacement or write-off of leasehold improvements or equipment.
(c) During the thirteen and thirty-nine weeks ended September 29, 2021, we completed the sale of our eight restaurants within Sacramento area to an existing franchisee. This sale resulted in cash proceeds of $4.6 million during the thirty-nine weeks ended September 29, 2021 and a net loss on sale of restaurants of less than $0.1 million and $1.5 million for the thirteen and thirty-nine weeks ended September 29, 2021, respectively.
(d) During the thirty-nine weeks ended September 23, 2020, we received insurance proceeds of $0.1 million related to a property claim.
(e) Includes costs related to impairment of long-lived and ROU assets and closing restaurants. During the thirteen and thirty-nine weeks ended September 29, 2021, we recorded non-cash impairment charges of $0.1 million and $0.7 million, respectively, primarily related to the carrying value of the ROU assets of one restaurant in Texas closed in 2019, the ROU assets of one restaurant in California, and the long-lived assets of three restaurants in California.
During the thirteen and thirty-nine weeks ended September 23, 2020, we recorded non-cash impairment charges of $1.5 million and $3.5 million, respectively, primarily related to the carrying value of the ROU assets of one restaurant in Texas and the long-lived assets of four restaurants in California.
During the thirteen and thirty-nine weeks ended September 29, 2021, we recognized $0.1 million and $0.4 million, respectively, of closed-store reserve expense related to the amortization of ROU assets, property taxes and CAM payments for our closed locations. During the thirteen and thirty-nine weeks ended September 23, 2020, we recognized $0.3 million and $1.1 million, respectively, of closed-store reserve expense, primarily related to the amortization of ROU assets, property taxes and CAM payments for our closed locations.
(f) On July 30, 2014, we entered into the TRA. This agreement calls for us to pay to our pre-IPO stockholders 85% of the savings in cash that we realize in our taxes as a result of utilizing our NOL and other tax attributes attributable to preceding periods. For the thirteen and thirty-nine weeks ended September 29, 2021 and September 23, 2020, income tax receivable agreement (income) expense consisted of the amortization of interest expense and changes in estimates for actual tax returns filed, related to our total expected TRA payments.
(g) Consists of costs related to the defense of securities lawsuits. During the thirteen and thirty-nine weeks ended September 29, 2021, we received $0.5 million in insurance proceeds, net of legal expenses, related to the derivative complaint. See Note 7, “Commitments and Contingencies, Legal Matters” in the Notes to Condensed Consolidated Financial Statements above.
(h) Includes amounts incurred related to the payment of the final settlement amounts for multiple wage and hour class action suits.
(i) Pre-opening costs are a component of general and administrative expenses, and consist of costs directly associated with the opening of new restaurants and incurred prior to opening, including management labor costs, staff labor
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costs during training, food and supplies used during training, marketing costs, and other related pre-opening costs. These are generally incurred over the three to five months prior to opening. Pre-opening costs also include occupancy costs incurred between the date of possession and the opening date for a restaurant.
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources have been cash provided from operations, cash and cash equivalents, and the 2018 Revolver. Our primary requirements for liquidity and capital are new restaurants, existing restaurant capital investments (remodels and maintenance), legal defense costs, lease obligations, interest payments on our debt, working capital and general corporate needs. Our working capital requirements are not significant, since our customers pay for their purchases in cash or by payment card (credit or debit) at the time of sale. Thus, we are able to sell many of our inventory items before we have to pay our suppliers. Our restaurants do not require significant inventories or receivables. We believe that these sources of liquidity and capital are sufficient to finance our continued operations for at least the next 12 months from the issuance of the consolidated financial statements. However, depending on the severity and longevity of the COVID-19 pandemic, the efforts taken to reduce its spread and the possibility of a subsequent resurgence of the COVID-19 outbreak, our financial performance and liquidity could be further impacted and could impact our ability to meet certain financial covenants required in our 2018 Credit Agreement, specifically the lease-adjusted coverage ratio and fixed-charge coverage ratio.
The following table presents summary cash flow information for the periods indicated.
Thirty-Nine Weeks Ended
(Amounts in thousands)
September 29, 2021
September 23, 2020
Net cash provided by (used in)
Operating activities
$
42,332
$
33,519
Investing activities
(8,143)
(4,349)
Financing activities
(22,739)
(7,711)
Net increase in cash
$
11,450
$
21,459
Operating Activities
For the thirty-nine weeks ended September 29, 2021, net cash from operating activities changed by approximately $8.8 million from the comparable period of the prior year. This change was due primarily to an increase in profitability after non-cash items and favorable working capital fluctuations.
Investing Activities
For the thirty-nine weeks ended September 29, 2021, net cash used in investing activities increased by $3.8 million from the comparable period of the prior year. This increase was due primarily to opening two new company-operated restaurants and remodeling ten restaurants in the thirty-nine weeks ended September 29, 2021 compared to opening one new company-operated restaurant and completing no new remodels in the thirty-nine weeks ended September 29, 2020.
Financing Activities
For the thirty-nine weeks ended September 29, 2021, net cash from financing activities changed by $15.0 million from the comparable period of the prior year. This change was due primarily to an increase in net pay downs of $22.8 million on the 2018 Revolver during the thirty-nine weeks ended September 29, 2021, compared to the net pay downs of $13.2 million on the 2018 Revolver during the thirty-nine weeks ended September 23, 2020.
Debt and Other Obligations
The 2018 Revolver, which is available pursuant to the 2018 Credit Agreement, includes a sub limit of $15.0 million for letters of credit and a sub limit of $15.0 million for swingline loans. The 2018 Revolver and 2018 Credit Agreement will
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mature on July 13, 2023. The obligations under the 2018 Credit Agreement and related loan documents are guaranteed by the Company and Intermediate. The obligations of the Company, EPL and Intermediate under the 2018 Credit Agreement and related loan documents are secured by a first priority lien on substantially all of their respective assets.
Under the 2018 Revolver, Holdings may not make certain payments such as cash dividends, except that it may, inter alia, (i) pay up to $1.0 million per year to repurchase or redeem qualified equity interests of Holdings held by past or present officers, directors, or employees (or their estates) of the Company upon death, disability, or termination of employment, (ii) pay under its TRA, and (iii) so long as no default or event of default has occurred and is continuing, (a) make non-cash repurchases of equity interests in connection with the exercise of stock options by directors, officers and management, provided that those equity interests represent a portion of the consideration of the exercise price of those stock options, (b) pay up to $0.5 million in any 12 month consecutive period to redeem, repurchase or otherwise acquire equity interests of any subsidiary that is not a wholly-owned subsidiary from any holder of equity interest in such subsidiary, (c) pay up to $2.5 million per year pursuant to stock option plans, employment agreements, or incentive plans, (d) make up to $5.0 million in other restricted payments per year, and (e) make other restricted payments, subject to its compliance, on a pro forma basis, with (x) a lease-adjusted consolidated leverage ratio not to exceed 4.25 times and (y) the financial covenants applicable to the 2018 Revolver.
Borrowings under the 2018 Credit Agreement (other than any swingline loans) bear interest, at the borrower’s option, at rates based upon either LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a lease-adjusted consolidated leverage ratio-based pricing grid. The base rate is calculated as the highest of (a) the federal funds rate plus 0.50%, (b) the published Bank of America prime rate, or (c) LIBOR plus 1.00%. For LIBOR loans, the margin is in the range of 1.25% to 2.25%, and for base rate loans the margin is in a range of 0.25% to 1.25%. Borrowings under the 2018 Revolver may be repaid and reborrowed. The interest rate range was 1.34% to 1.35% and 1.34% to 1.65% for the thirteen and thirty-nine weeks ended September 29, 2021, respectively, and 1.67% to 1.68% and 1.67% to 3.29% for the thirteen and thirty-nine weeks ended September 23, 2020, respectively.
The 2018 Credit Agreement contains certain financial covenants. The Company was in compliance with the financial covenants as of September 29, 2021.
At September 29, 2021, $8.4 million of letters of credit and $40.0 million of borrowings were outstanding under the 2018 Revolver. There were $101.6 million remaining borrowings available under the 2018 Revolver at September 29, 2021.
During the year ended December 25, 2019, we entered into an interest rate swap with a notional amount of $40.0 million, related to the outstanding borrowings under our 2018 Revolver. The interest rate swap was designated as a cash flow hedge and effectively converted a portion of our outstanding borrowings to a fixed rate of 1.31%, plus the applicable margin spread, which was 1.5% for the thirteen and thirty-nine weeks ended September 29, 2021. The interest rate swap matures in June 2023.
Contractual Obligations
Other than our paydown of $22.8 million on the 2018 Revolver during the thirty-nine weeks ended September 29, 2021 described above, our contractual obligations outstanding on September 29, 2021 have not changed materially since those disclosed under “Debt and Other Obligations – Contractual Obligations” in Part II, Item 7 of our annual report on Form 10-K for the year ended December 30, 2020. Our contractual commitments relate to future (i) debt payments, including expected interest expense, calculated based on current interest rates, (ii) restaurant operating lease payments, (iii) income tax receivable agreement payments, and (iv) purchasing commitments for chicken.
Off-Balance Sheet and Other Arrangements
As of September 29, 2021 and December 25, 2020, we were using $8.4 million of borrowing capacity on the 2018 Revolver for letters of credit in support of our insurance programs.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.