What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-02 compared with 2023-05-03 · 163 added, 71 removed, 237 unchanged (50% of the section changed)

17 unchanged sentences

This reclassification had no impact on operating income, balance sheets or statements of cash flows.

First Quarter of 2023 Highlights

• System-wide sales increased 30.4% over the prior fiscal first quarter to $821.6 million;

• 37 net new openings in the fiscal first quarter 2023 for a total of 1,996 worldwide locations;

• Domestic same store sales increased 20.1% over the prior fiscal first quarter;

• Company-owned restaurant same store sales increased 10.3% over the prior fiscal first quarter;

Second Quarter of 2023 Highlights

• System-wide sales increased 27.8% over the prior fiscal second quarter to $809.8 million;

• 50 net new openings in the fiscal second quarter 2023 for a total of 2,046 worldwide locations;

• Domestic same store sales increased 16.8% over the prior fiscal second quarter;

• Company-owned restaurant same store sales increased 5.7% over the prior fiscal second quarter;

• Digital sales increased to 65.2%;

• Domestic restaurant AUVs increased to $1.7 million for the current fiscal quarter;

• Total revenue increased 42.7% to $108.7 million from the prior fiscal first quarter;

• Net income increased 80.6% to $15.7 million, or $0.52 per diluted share, compared to net income of $8.7 million, or $0.29 per diluted share in the prior fiscal first quarter;

• Adjusted EBITDA, a non-GAAP measure, increased 59.8% to $34.6 million, compared to adjusted EBITDA of $21.6 million in the prior fiscal first quarter.

• Domestic restaurant AUVs exceeded $1.7 million in the current fiscal second quarter;

• Total revenue increased 27.9% to $107.2 million over the prior fiscal second quarter;

• Net income increased 21.6% to $16.2 million, or $0.54 per diluted share, compared to net income of $13.3 million, or $0.44 per diluted share in the prior fiscal second quarter;

• Adjusted EBITDA, a non-GAAP measure, increased 47.1% to $34.4 million, compared to adjusted EBITDA of $23.3 million in the prior fiscal second quarter.

Year-to-Date Second Quarter of 2023 Highlights

• System-wide sales increased 29.1% to $1.6 billion;

• 87 net new openings in the year-to-date second quarter of 2023;

• Domestic same store sales increased 18.4% over the prior fiscal year-to-date period;

• Total revenue increased 34.9% to $215.9 million over the prior fiscal year-to-date period;

• Net income increased 44.9% to $31.9 million, or $1.06 per diluted share, compared to net income of $22.0 million, or $0.73 per diluted share in the prior fiscal year-to-date period;

• Adjusted EBITDA, a non-GAAP measure, increased 53.2% to $68.9 million, compared to adjusted EBITDA of $45.0 million in the prior fiscal year-to-date period.

Key Performance Indicators

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Management reviews the number of new restaurants, the number of closed restaurants, and the number of acquisitions and divestitures of restaurants to assess net new restaurant growth.

Thirteen Weeks Ended

2023 March 26,

Thirteen Weeks Ended Twenty-Six Weeks Ended

2023 June 25,

Domestic Franchised Activity:

2 unchanged sentences

Closures (1) — (1) (3)

Acquired by Company (2) — (2) —

Restaurants end of period 1,749 1,600 1,749 1,600

1 unchanged sentence

Beginning of period 43 37 43 36

Openings — 2 — 3

Closures — — — —

Acquired by Company 2 — 2 —

Restaurants end of period 45 39 45 39

2 unchanged sentences

Beginning of period 243 203 238 197

Openings 9 16 17 23

Closures — — (3) (1)

2 unchanged sentences

System-wide sales.

System-wide sales represents net sales for all of our company-owned and franchised restaurants.

System-wide sales represents net sales for all of our company-owned and franchised restaurants, as reported by franchisees.

This measure allows management to better assess changes in our royalty revenue, our overall store performance, the health of our brand, and the strength of our market position relative to competitors.

15 unchanged sentences

We define EBITDA as net income before interest expense, net, income tax expense (benefit), and depreciation and amortization.

We define Adjusted EBITDA as net income before interest expense, net, income tax expense (benefit), and depreciation and amortization, with further adjustments for losses on debt extinguishment and financing transactions, transaction costs, costs and fees associated with investments in our strategic initiatives, and stock-based

compensation expense.

Adjusted EBITDA may not be comparable to other similarly titled captions of other companies due to differences in methods of calculation.

4 unchanged sentences

For a reconciliation of net income to Adjusted net income and for further discussion of Adjusted net income and Adjusted earnings per diluted share as non-GAAP measures and how we utilize them, see footnote 3 below.

The following table sets forth our key performance indicators for the thirteen weeks ended April 1, 2023 and March 26, 2022 (in thousands, except unit data):

Thirteen Weeks Ended

April 1, 2023 March 26, 2022

The following table sets forth our key performance indicators for the thirteen and twenty-six weeks ended July 1, 2023 and June 25, 2022 (in thousands, except unit data):

Thirteen Weeks Ended Twenty-Six Weeks Ended

July 1, 2023 June 25, 2022 July 1, 2023 June 25, 2022

Number of system-wide restaurants open at end of period 2,046 1,858 2,046 1,858

10 unchanged sentences

$ 17,005 $ 13,345 $ 34,776 $ 23,160

(1) The percentage of system-wide sales attributable to company-owned restaurants was 2.8% and 3.0% for the thirteen weeks ended April 1, 2023 and March 26, 2022, respectively.

(1) The percentage of system-wide sales attributable to company-owned restaurants was 2.8% and 3.0% for the thirteen and twenty-six weeks ended July 1, 2023 and June 25, 2022, respectively.

The remainder was generated by franchised restaurants, as reported by our franchisees.

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• to evaluate our capacity to fund capital expenditures and expand our business;

• to calculate incentive compensation payments for our employees, including assessing performance under our annual incentive compensation plan and determining the vesting of performance-based equity awards.

• to calculate incentive compensation payments for our employees, including assessing performance under our annual incentive compensation plan.

By providing these non-GAAP financial measures, together with a reconciliation to the most comparable GAAP measure, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives.

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Each of the normal recurring adjustments and other adjustments described in this paragraph and in the reconciliation table below help management measure our core operating performance over time by removing items that are not related to day-to-day operations.

The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen weeks ended April 1, 2023 and March 26, 2022 (in thousands):

Thirteen Weeks Ended

2023 March 26,

The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen and twenty-six weeks ended July 1, 2023 and June 25, 2022 (in thousands):

Thirteen Weeks Ended Twenty-Six Weeks Ended

2023 June 25,

Net income $ 16,181 $ 13,307 $ 31,850 $ 21,983

6 unchanged sentences

Consulting fees (b)

1,084 50 3,850 425

Stock-based compensation expense (c)

3,546 (1,601) 6,890 590

Adjusted EBITDA $ 34,350 $ 23,344 $ 68,933 $ 44,989

(a) Represents costs and expenses related to our 2022 securitized financing facility and payment of a special dividend, as well as the extinguishment of our 2020 variable funding note facility;

all transaction costs are included in Loss on debt extinguishment during the thirteen weeks ended March 26, 2022, with the exception of $310,000 that is included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(b) Represents costs and expenses related to a consulting project to support the Company's strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

all transaction costs are included in Loss on debt extinguishment and financing transaction costs during the twenty-six weeks ended June 25, 2022, with the exception of $310,000 that is included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(b) Represents non-recurring consulting fees that are not part of our ongoing operations and are incurred to execute discrete, project-based strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

The costs incurred in the thirteen and twenty-six weeks ended June 25, 2022 include third-party consulting fees incurred relating to a strategic initiative to consider the development of a business plan and financial model for potential vertical integration of a poultry complex, which review was completed in fiscal year 2022.

The costs incurred in the thirteen and twenty-six weeks ended July 1, 2023 include consulting fees relating to a comprehensive review of our long-term growth strategy for our domestic business to explore potential future initiatives, and which review is expected to be completed in fiscal year 2023.

Given the magnitude and scope of these two strategic review initiatives that are not expected to recur in the foreseeable future, the Company considers the incremental consulting fees incurred with respect to the initiatives not reflective of the ongoing costs to operate its business.

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Management believes adjusted net income and adjusted earnings per diluted share supplement GAAP measures and enable management to more effectively evaluate the Company’s performance period-over-period and relative to competitors.

The following table reconciles net income to Adjusted net income and calculates adjusted earnings per diluted share for the thirteen weeks ended April 1, 2023 and March 26, 2022 (in thousands):

Thirteen Weeks Ended

2023 March 26,

The following table reconciles net income to Adjusted net income and calculates adjusted earnings per diluted share for the thirteen and twenty-six weeks ended July 1, 2023 and June 25, 2022 (in thousands):

Thirteen Weeks Ended Twenty-Six Weeks Ended

2023 June 25,

Net income $ 16,181 $ 13,307 $ 31,850 $ 21,983

1 unchanged sentence

Consulting fees (b)

1,084 50 3,850 425

Tax effect of adjustments (c)

(260) (12) (924) (372)

Adjusted net income $ 17,005 $ 13,345 $ 34,776 $ 23,160

2 unchanged sentences

(a) Represents costs and expenses related to our 2022 securitized financing facility and payment of a special dividend, as well as the extinguishment of our 2020 variable funding note facility;

(b) Represents costs and expenses related to a consulting project to support the Company’s strategic initiatives, which are included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(c) Represents the tax effect of the aforementioned adjustments to reflect corporate income taxes at an assumed effective tax rate of 24% for the thirteen weeks ended April 1, 2023 and March 26, 2022, which includes provisions for U.S.

all transaction costs are included in Loss on debt extinguishment and financing transactions during the twenty-six weeks ended June 25, 2022, with the exception of $310,000 that is included in Selling, general and administrative on the Consolidated Statements of Comprehensive Income.

(c) Represents the tax effect of the aforementioned adjustments to reflect corporate income taxes at an assumed effective tax rate of 24% for the thirteen and twenty-six weeks ended July 1, 2023 and June 25, 2022, which includes provisions for U.S.

federal income taxes, and assumes the respective statutory rates for applicable state and local jurisdictions.

Results of Operations

Thirteen Weeks Ended April 1, 2023 compared to Thirteen Weeks Ended March 26, 2022

The following table sets forth our results of operations for the thirteen weeks ended April 1, 2023 and March 26, 2022 (dollars in thousands):

Thirteen Weeks Ended July 1, 2023 compared to Thirteen Weeks Ended June 25, 2022

The following table sets forth our results of operations for the thirteen weeks ended July 1, 2023 and June 25, 2022 (dollars in thousands):

Thirteen Weeks Ended Increase / (Decrease)

2023 March 26,

2023 June 25,

Royalty revenue, franchise fees and other $ 47,984 $ 36,044 $ 11,940 33.1 %

12 unchanged sentences

Interest expense, net 4,244 5,986 (1,742) (29.1) %

Loss on debt extinguishment — 814 (814) (100.0) %

Other expense 188 65 123 189.2 %

Other (income) expense (46) 26 (72) NM*

Income before income tax expense 22,258 16,362 5,896 36.0 %

1 unchanged sentence

Net income $ 16,181 $ 13,307 $ 2,874 21.6 %

*Not meaningful.

(1) Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately.

Total revenue.

During the thirteen weeks ended April 1, 2023, total revenue was $108.7 million, an increase of $32.5 million, or 42.7%, compared to $76.2 million in the comparable period in 2022.

Royalty revenue, franchise fees and other increased $13.1 million, of which $3.6 million was due to 199 net franchise restaurant openings since March 26, 2022, and $7.8 million was due to domestic same store sales growth of 20.1%.

During the thirteen weeks ended July 1, 2023, total revenue was $107.2 million, an increase of $23.4 million, or 27.9%, compared to $83.8 million in the comparable period in 2022.

Royalty revenue, franchise fees and other increased $11.9 million, of which $3.3 million was due to 182 net franchise restaurant openings since June 25, 2022, and $7.0 million was due to domestic same store sales growth of 16.8%.

Other revenue increased by $1.6 million primarily due to an increase in vendor rebates.

Advertising fees increased $14.9 million, of which $8.7 million was due to a 30.4% increase in system-wide sales during the fiscal first quarter 2023, and $6.2 million was due to an increase in the national advertising fund contribution rate to 5% from 4% effective the first day of the fiscal second quarter 2022.

Company-owned restaurant sales increased $4.5 million, due to an increase of $2.9 million related to the addition of six net new company-owned restaurants since the prior year fiscal quarter.

Advertising fees increased $7.6 million due to a 27.8% increase in system-wide sales during the fiscal second quarter 2023.

Company-owned restaurant sales increased $3.8 million, due to an increase of $2.9 million related to the addition of six net new company-owned restaurants since the prior fiscal second quarter.

The remainder of the increase was due to company-owned same store sales growth of 5.7%, which was driven by an increase in transactions.

Cost of sales.

During the thirteen weeks ended April 1, 2023, cost of sales was $16.7 million, an increase of $1.0 million, or 6.5%, compared to $15.7 million in the comparable period in 2022.

Cost of sales as a percentage of company-owned restaurant sales was 72.4% in the thirteen weeks ended April 1, 2023, compared to 84.3% in the comparable period in 2022.

During the thirteen weeks ended July 1, 2023, cost of sales was $16.6 million, an increase of $1.7 million, or 11.7%, compared to $14.9 million in the comparable period in 2022.

Cost of sales as a percentage of company-owned restaurant sales was 73.7% in the thirteen weeks ended July 1, 2023, compared to 79.5% in the comparable period in 2022.

The table below presents the major components of cost of sales (dollars in thousands):

Thirteen Weeks Ended

April 1, 2023 March 26, 2022

July 1, 2023 June 25, 2022

In dollars As a % of company-owned restaurant sales In dollars As a % of company-owned restaurant sales

5 unchanged sentences

Total cost of sales $ 16,642 73.7 % $ 14,899 79.5 %

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 32.4% in the thirteen weeks ended April 1, 2023, compared to 42.8% in the comparable period in 2022.

This improvement was primarily due to a 52.8% decrease in the cost of bone-in chicken wings as compared to the prior year period, partially offset by inflation in other food costs since the prior fiscal first quarter 2022.

Labor costs as a percentage of company-owned restaurant sales were 23.9% for the thirteen weeks ended April 1, 2023, compared to 25.8% in the comparable period in 2022.

The decrease as a percentage of company-owned restaurant sales was primarily due to our ability to leverage costs due to the company-owned domestic same store sales increase of 10.3%.

This was partially offset by increases in company-owned restaurant wages during the thirteen weeks ended April 1, 2023.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 18.3% for the thirteen weeks ended April 1, 2023, compared to 17.8% in the comparable period in 2022.

The increase as a percentage of company-owned restaurant sales were primarily a result of the increase in the national advertising fund contribution rate to 5% from 4% effective the first day of the fiscal second quarter 2022.

This increase was partially offset by a decline in pre-opening expenses of $0.4 million related to company-owned restaurants opened in Manhattan, NY in the prior fiscal first quarter.

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 32.2% in the thirteen weeks ended July 1, 2023, compared to 39.3% in the comparable period in 2022.

This improvement was primarily due to a 39.6% decrease in the cost of bone-in chicken wings as compared to the prior year period.

Labor costs as a percentage of company-owned restaurant sales were 24.4% for the thirteen weeks ended July 1, 2023, compared to 23.1% in the comparable period in 2022.

The increase as a percentage of company-owned restaurant sales was primarily due to increases in company-owned restaurant wages during the thirteen weeks ended July 1, 2023, partially offset by cost leverage due to the company-owned domestic same store sales increase of 5.7%.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 19.5% for the thirteen weeks ended July 1, 2023, which was comparable to 19.2% for the thirteen weeks ended June 25, 2022.

Advertising expenses.

During the thirteen weeks ended April 1, 2023, advertising expenses were $39.6 million, an increase of $16.5 million compared to $23.2 million in the comparable period in 2022.

During the thirteen weeks ended July 1, 2023, advertising expenses were $38.7 million, an increase of $9.0 million compared to $29.7 million in the comparable period in 2022.

Advertising expenses are recognized at the same time the related revenue is recognized, which does not necessarily correlate to the actual timing of the related advertising spend.

Selling, general and administrative (SG&A).

During the thirteen weeks ended April 1, 2023, SG&A expense was $23.6 million, an increase of $5.6 million compared to $18.1 million in the comparable period in 2022.

The increase in SG&A expense was due to an increase of $2.8 million related to consulting fees associated with the Company’s strategic initiatives, a $1.6 million increase in incentive compensation and performance-based stock compensation expense recognized related to the Company’s performance, and a $0.6 million increase in headcount related expenses to support the growth in our business.

During the thirteen weeks ended July 1, 2023, SG&A expense was $22.1 million, an increase of $8.2 million compared to $13.9 million in the comparable period in 2022.

The prior fiscal second quarter was impacted by the benefit of $4.1 million in stock awards forfeited during the quarter.

In addition, incentive compensation and performance-based stock compensation expense increased $2.2 million related to the Company’s current fiscal year performance, headcount related expenses increased $1.2 million to support the growth in our business, and consulting fees increased $1.1 million associated with the Company’s strategic initiatives.

Depreciation and amortization.

During the thirteen weeks ended April 1, 2023, depreciation expense was $3.0 million, an increase of $0.8 million compared to $2.2 million in the comparable period in 2022.

During the thirteen weeks ended July 1, 2023, depreciation expense was $3.2 million, an increase of $0.7 million compared to $2.5 million in the comparable period in 2022.

The increase in depreciation and amortization was primarily due to capital expenditures related to our technology investments.

Interest expense, net.

During the thirteen weeks ended April 1, 2023, interest expense, net was $4.6 million, an increase of $0.4 million compared to $4.2 million of interest expense, net in the comparable period in 2022.

The increase was due to an additional $1.8 million in interest expense relating to the securitized financing transaction completed on March 9, 2022, which increased our outstanding debt by $250 million.

This was partially offset by an increase of $1.4 million in interest income earned on our cash balances during the thirteen weeks ended April 1, 2023.

During the thirteen weeks ended July 1, 2023, interest expense, net was $4.2 million, a decrease of $1.7 million compared to $6.0 million of interest expense, net in the comparable period in 2022.

The decrease was driven by $1.6 million in interest income earned on our cash balances during the thirteen weeks ended July 1, 2023.

Income tax expense.

During the thirteen weeks ended July 1, 2023, we recognized income tax expense of $6.1 million yielding an effective tax rate of 27.3%, compared to an effective tax rate of 18.7% in the prior year period.

The increase in the effective tax rate was primarily due to the impact of stock awards forfeited during the thirteen weeks ended June 25, 2022.

Twenty-Six Weeks Ended July 1, 2023 compared to Twenty-Six Weeks Ended June 25, 2022

The following table sets forth our results of operations for the twenty-six weeks ended July 1, 2023 and June 25, 2022 (dollars in thousands):

Twenty-Six Weeks Ended Increase / (Decrease)

2023 June 25,

Royalty revenue, franchise fees and other $ 96,172 $ 71,114 $ 25,058 35.2 %

Advertising fees 74,059 51,526 22,533 43.7 %

Company-owned restaurant sales 45,663 37,342 8,321 22.3 %

Total revenue 215,894 159,982 55,912 34.9 %

Costs and expenses:

Cost of sales (1)

33,337 30,573 2,764 9.0 %

Advertising expenses 78,372 52,852 25,520 48.3 %

Selling, general and administrative 45,773 32,035 13,738 42.9 %

Depreciation and amortization 6,207 4,774 1,433 30.0 %

Loss on disposal of assets 77 767 (690) (90.0) %

Total costs and expenses 163,766 121,001 42,765 35.3 %

Operating income 52,128 38,981 13,147 33.7 %

Interest expense, net 8,817 10,178 (1,361) (13.4) %

Loss on debt extinguishment — 814 (814) (100.0) %

Loss on debt extinguishment in the prior fiscal first quarter was $0.8 million due to costs and fees associated with the extinguishment of our 2020 variable funding note facility on March 9, 2022.

Other (income) expense 142 91 51 56.0 %

Income before income tax expense 43,169 27,898 15,271 54.7 %

Income tax expense 11,319 5,915 5,404 91.4 %

During the thirteen weeks ended April 1, 2023, we recognized income tax expense of $5.2 million yielding an effective tax rate of 25.1%, which is comparable to the effective tax rate of 24.8% in the prior year period.

Net income $ 31,850 $ 21,983 $ 9,867 44.9 %

(1) Cost of sales includes all operating expenses of company-owned restaurants, including advertising expenses, and excludes depreciation and amortization, which are presented separately.

Total revenue.

During the twenty-six weeks ended July 1, 2023, total revenue was $215.9 million, an increase of $55.9 million, or 34.9%, compared to $160.0 million in the comparable period in 2022.

Royalty revenue, franchise fees and other increased $25.1 million, of which $5.6 million was due to 182 net franchise restaurant openings since June 25, 2022, and $16.2 million was due to domestic same store sales growth of 18.4%.

Other revenue increased by $3.3 million primarily due to an increase in vendor rebates.

Advertising fees increased $22.5 million, of which $16.3 million was due to the 29.1% increase in system-wide sales during the twenty-six weeks ended July 1, 2023, and $6.2 million was due to an increase in the national advertising fund contribution rate to 5% from 4% effective the first day of the fiscal second quarter 2022.

Company-owned restaurant sales increased $8.3 million primarily due to an increase of $5.0 million related to the addition of six net new company-owned restaurants since the prior year comparable period.

The remainder of the increase was due to company-owned same store sales growth of 7.9%, which was driven by an increase in transactions.

Cost of sales.

During the twenty-six weeks ended July 1, 2023, cost of sales was $33.3 million, an increase of $2.8 million, or 9.0%, compared to $30.6 million in the comparable period in 2022.

Cost of sales as a percentage of company-owned restaurant sales was 73.0% in the twenty-six weeks ended July 1, 2023, compared to 81.9% in the comparable period in 2022.

The table below presents the major components of cost of sales (dollars in thousands):

Twenty-Six Weeks Ended

July 1, 2023 June 25, 2022

In dollars As a % of company-owned restaurant sales In dollars As a % of company-owned restaurant sales

Cost of sales:

Food, beverage and packaging costs $ 14,751 32.3 % $ 15,343 41.1 %

Labor costs 11,037 24.2 % 9,136 24.5 %

Other restaurant operating expenses 8,633 18.9 % 6,913 18.5 %

Vendor rebates (1,084) (2.4) % (819) (2.2) %

Total cost of sales $ 33,337 73.0 % $ 30,573 81.9 %

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 32.3% in the twenty-six weeks ended July 1, 2023, compared to 41.1% in the comparable period in 2022.

The decrease was primarily due to a 47.1% decrease in the cost of bone-in chicken wings as compared to the prior year period.

Labor costs as a percentage of company-owned restaurant sales were 24.2% for the twenty-six weeks ended July 1, 2023, compared to 24.5% in the comparable period in 2022.

The decrease as a percentage of company-owned restaurant sales was primarily due to cost leverage related to the company-owned domestic same store sales increase of 7.9%.

This was partially offset by increases in company-owned restaurant wages during the twenty-six weeks ended July 1, 2023.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 18.9% for the twenty-six weeks ended July 1, 2023, compared to 18.5% in the comparable period in 2022.

The increase as percentage of company-owned restaurant sales was primarily a result of the increase in the national advertising fund contribution rate to 5% from 4% effective the first day of the fiscal second quarter 2022.

Advertising expenses.

During the twenty-six weeks ended July 1, 2023, advertising expenses were $78.4 million, an increase of $25.5 million compared to $52.9 million in the comparable period in 2022.

Advertising expenses are recognized at the same time the related revenue is recognized, which does not necessarily correlate to the actual timing of the related advertising spend.

Selling, general and administrative (SG&A).

During the twenty-six weeks ended July 1, 2023, SG&A expense was $45.8 million, an increase of $13.7 million compared to $32.0 million in the comparable period in 2022.

The prior fiscal second quarter was impacted by the benefit of $4.1 million in stock awards forfeited during the quarter.

In addition, consulting fees increased $3.9 million associated with the Company’s strategic initiatives, incentive compensation and performance-based stock compensation expense increased $3.7 million primarily related to the Company’s current fiscal year performance, and headcount related expenses increased $1.8 million to support the growth in our business.

Depreciation and amortization.

During the twenty-six weeks ended July 1, 2023, depreciation expense was $6.2 million, an increase of $1.4 million compared to $4.8 million in the comparable period in 2022.

The increase in depreciation and amortization was primarily due to capital expenditures related to our technology investments.

Interest expense, net.

During the twenty-six weeks ended July 1, 2023, interest expense, net was $8.8 million, a decrease of $1.4 million compared to $10.2 million of interest expense, net in the comparable period in 2022.

The decrease was due to $3.1 million of additional interest income earned on our cash balances during the twenty-six weeks ended July 1, 2023, partially offset by an increase of $1.7 million in interest expense related to the securitized financing transaction completed on March 9, 2022, which increased our outstanding debt by $250 million.

Loss on debt extinguishment .

Loss on debt extinguishment was $0.8 million during the twenty-six weeks ended June 25, 2022 due to costs and fees associated with the extinguishment of our 2020 Variable Funding Note Facility on March 9, 2022.

Income tax expense.

During the twenty-six weeks ended July 1, 2023, we recognized income tax expense of $11.3 million yielding an effective tax rate of 26.2%, compared to an effective tax rate of 21.2% in the prior year period.

The increase in the effective tax rate was primarily due to the impact of stock awards forfeited during the twenty-six weeks ended June 25, 2022.

Liquidity and Capital Resources

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Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and available borrowings under our 2022 Variable Funding Notes (as defined below).

As of April 1, 2023, the Company had $227.0 million of cash and restricted cash on its balance sheet.

As of July 1, 2023, the Company had $214.1 million of cash and restricted cash on its balance sheet.

Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with our securitized financing facility including our 2022 Variable Funding Notes, will be sufficient to meet our capital expenditure, working capital and debt service requirements for at least the next twelve months and the foreseeable future.

The following table shows summary cash flows information for the thirteen weeks ended April 1, 2023 and March 26, 2022 (in thousands):

Thirteen Weeks Ended

2023 March 26,

The following table shows summary cash flows information for the twenty-six weeks ended July 1, 2023 and June 25, 2022 (in thousands):

Twenty-Six Weeks Ended

2023 June 25,

Net cash provided by (used in):

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Restaurant-level operating costs at our company-owned restaurants, unearned franchise and development fees, and corporate overhead costs also impact our cash flow from operating activities.

Net cash provided by operating activities was $35.7 million in the thirteen weeks ended April 1, 2023, an increase of $15.3 million from cash provided by operating activities of $20.4 million in the thirteen weeks ended March 26, 2022.

Net cash provided by operating activities was $48.0 million in the twenty-six weeks ended July 1, 2023, an increase of $18.5 million from cash provided by operating activities of $29.5 million in the twenty-six weeks ended June 25, 2022.

The increase is the result of increased operating income associated with the increased sales over the prior period, as well as the timing of changes in working capital.

Investing activities .

Our net cash used in investing activities was $4.3 million in the thirteen weeks ended April 1, 2023, a decrease of $0.5 million from cash used in investing activities of $4.8 million in the thirteen weeks ended March 26, 2022.

The decrease in cash used in investing activities was primarily due to a decrease in capital expenditures related to our investments in technology.

Our net cash used in investing activities was $22.2 million in the twenty-six weeks ended July 1, 2023, an increase of $13.1 million from cash used in investing activities of $9.1 million in the twenty-six weeks ended June 25, 2022.

The increase in cash used in investing activities was primarily due to an increase in capital expenditures related to our technology investments, the acquisition of two restaurants from a franchisee during the twenty-six weeks ended June 25, 2022, and the sale of assets to franchisees during the prior fiscal year period.

Financing activities .

Our net cash used in financing activities was $10.1 million in the thirteen weeks ended April 1, 2023, a change of $249.2 million from cash provided by financing activities of $239.1 million in the thirteen weeks ended March 26, 2022.

The change was primarily due to the net cash provided by additional borrowings under our 2022 Class A-2 Notes (as defined below) of $250 million in the first quarter of 2022.

Our net cash used in financing activities was $17.4 million in the twenty-six weeks ended July 1, 2023, a change of $133.7 million from cash provided by financing activities of $116.3 million in the twenty-six weeks ended June 25, 2022.

The change was primarily due to the net cash provided by additional borrowings under our 2022 Class A-2 Notes (as defined below) of $250 million in the first quarter of 2022, partially offset by the payment of a special dividend in connection with the securitized financing transaction totaling $119.5 million and deferred financing and other debt related costs incurred of $5.4 million during the twenty-six weeks ended June 25, 2022.

Securitized financing facility .

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In addition to the 2022 Notes, the Company’s outstanding debt consists of its existing Series 2020-1 2.84% Fixed Rate Senior Secured Notes, Class A-2 (the “2020 Class A-2 Notes”).

No borrowings were outstanding under the 2022 Variable Funding Notes as of April 1, 2023.

We paid a quarterly cash dividend of $0.19 per share of common stock, aggregating $5.7 million in the first quarter of 2023.

On May 2, 2023 the Company’s Board of Directors approved a dividend of $0.19 per share, to be paid on June 9, 2023 to stockholders of record as of May 19, 2023, totaling approximately $5.7 million

No borrowings were outstanding under the 2022 Variable Funding Notes as of July 1, 2023.

During the second fiscal quarter of 2023, the Company had a leverage ratio under the 2020 Class A-2 Notes and the 2022 Class A-2 Notes of less than 5.0x.

Per the terms of the Company’s debt agreements, principal payments are not due until the repayment date as long as the Company maintains a leverage ratio of less than 5.0x.

Accordingly, the entire outstanding balance of the 2020 Class A-2 Notes and the 2022 Class A-2 Notes has been classified as long-term debt due after fiscal year 2026.

We paid a quarterly cash dividend of $0.19 per share of common stock in each of the first two quarters of 2023, aggregating $11.4 million in the twenty-six weeks ended July 1, 2023.

On August 1, 2023 the Company’s Board of Directors approved a dividend of $0.22 per share, to be paid on September 8, 2023 to stockholders of record as of August 18, 2023, totaling approximately $6.6 million.

We do not currently expect the restrictions in our debt instruments to impact our ability to make regular quarterly dividends pursuant to our quarterly dividend program.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis