What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-01 compared with 2023-08-02 · 120 added, 104 removed, 296 unchanged (43% of the section changed)

17 unchanged sentences

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

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;

Third Quarter of 2023 Highlights

• System-wide sales increased 26.5% over the prior fiscal third quarter to $885.0 million;

• 53 net new openings in the fiscal third quarter 2023 for a total of 2,099 worldwide locations;

• Domestic same store sales increased 15.3% over the prior fiscal third quarter;

• Company-owned restaurant same store sales increased 6.0% over the prior fiscal third quarter;

• Digital sales increased to 66.9%;

• 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

• Domestic restaurant AUVs increased to $1.8 million in the current fiscal third quarter;

• Total revenue increased 26.4% to $117.1 million over the prior fiscal third quarter;

• Net income increased 46.0% to $19.5 million, or $0.65 per diluted share, compared to net income of $13.4 million, or $0.45 per diluted share in the prior fiscal third quarter;

• Adjusted net income and adjusted earnings per diluted share, both non-GAAP measures, increased 53.3% to $20.5 million, or $0.69 per diluted share, compared to $13.4 million, or $0.45 per diluted share in the prior fiscal third quarter;

• Adjusted EBITDA, a non-GAAP measure, increased 36.7% to $38.5 million, compared to adjusted EBITDA of $28.2 million in the prior fiscal third quarter.

Year-to-Date Third Quarter of 2023 Highlights

• System-wide sales increased 28.2% to $2.5 billion;

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

• 140 net new openings in the year-to-date third quarter of 2023;

• Domestic same store sales increased 17.3% over the prior fiscal year-to-date period;

1 unchanged sentence

• Net income increased 45.3% to $51.4 million, or $1.71 per diluted share, compared to net income of $35.4 million, or $1.18 per diluted share in the prior fiscal year-to-date period;

• Adjusted net income and adjusted earnings per diluted share, both non-GAAP measures, increased 51.3% to $55.3 million, or $1.84 per diluted share, compared to $36.5 million, or $1.22 per diluted share in the prior fiscal third quarter;

• Adjusted EBITDA, a non-GAAP measure, increased 46.9% to $107.4 million, compared to adjusted EBITDA of $73.1 million in the prior fiscal year-to-date period.

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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 Twenty-Six Weeks Ended

2023 June 25,

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 30,

2023 September 24,

2022 September 30,

2023 September 24,

Domestic Franchised Activity:

43 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 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

The following table sets forth our key performance indicators for the thirteen and thirty-nine weeks ended September 30, 2023 and September 24, 2022 (in thousands, except unit data):

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 30, 2023 September 24, 2022 September 30, 2023 September 24, 2022

Number of system-wide restaurants open at end of period 2,099 1,898 2,099 1,898

10 unchanged sentences

$ 20,499 $ 13,368 $ 55,275 $ 36,528

(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.

(1) The percentage of system-wide sales attributable to company-owned restaurants was 2.7% and 2.9% for the thirteen weeks ended September 30, 2023 and September 24, 2022, respectively, and was 2.8% and 2.9% for the thirty-nine weeks ended September 30, 2023 and September 24, 2022, respectively.

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

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We present EBITDA and Adjusted EBITDA because we consider them to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry.

Management believes that investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations.

Management believes that investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for

comparing our ongoing results of operations.

Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations on a period-over-period basis and would ordinarily add back non-cash expenses such as depreciation and amortization, as well as items that are not part of normal day-to-day operations of our business.

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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 and twenty-six weeks ended July 1, 2023 and June 25, 2022 (in thousands):

Thirteen Weeks Ended Twenty-Six Weeks Ended

2023 June 25,

The following table reconciles net income to EBITDA and Adjusted EBITDA for the thirteen and thirty-nine weeks ended September 30, 2023 and September 24, 2022 (in thousands):

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 30,

2023 September 24,

2022 September 30,

2023 September 24,

Net income $ 19,511 $ 13,368 $ 51,361 $ 35,351

11 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;

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.

all transaction costs are included in Loss on debt extinguishment and financing transaction costs during the thirty-nine weeks ended September 24, 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.

The costs incurred in the thirty-nine weeks ended September 24, 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 thirty-nine weeks ended September 30, 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 and twenty-six weeks ended July 1, 2023 and June 25, 2022 (in thousands):

Thirteen Weeks Ended Twenty-Six Weeks Ended

2023 June 25,

The following table reconciles net income to Adjusted net income and calculates adjusted earnings per diluted share for the thirteen and thirty-nine weeks ended September 30, 2023 and September 24, 2022 (in thousands):

Thirteen Weeks Ended Thirty-Nine Weeks Ended

September 30,

2023 September 24,

2022 September 30,

2023 September 24,

Net income $ 19,511 $ 13,368 $ 51,361 $ 35,351

8 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;

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.

all transaction costs are included in Loss on debt extinguishment and financing transactions during the thirty-nine weeks ended September 24, 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.

(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 thirty-nine weeks ended September 30, 2023 and September 24, 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 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 September 30, 2023 compared to Thirteen Weeks Ended September 24, 2022

The following table sets forth our results of operations for the thirteen weeks ended September 30, 2023 and September 24, 2022 (dollars in thousands):

Thirteen Weeks Ended Increase / (Decrease)

2023 June 25,

September 30,

2023 September 24,

Royalty revenue, franchise fees and other $ 53,200 $ 40,363 $ 12,837 31.8 %

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Interest expense, net 4,520 5,742 (1,222) (21.3) %

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

Other (income) expense (19) 290 (309) (106.6) %

Income before income tax expense 26,151 18,049 8,102 44.9 %

1 unchanged sentence

Net income $ 19,511 $ 13,368 $ 6,143 46.0 %

*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 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%.

During the thirteen weeks ended September 30, 2023, total revenue was $117.1 million, an increase of $24.4 million, or 26.4%, compared to $92.7 million in the comparable period in 2022.

Royalty revenue, franchise fees and other increased $12.8 million, of which $5.7 million was due to domestic same store sales growth of 15.3%, and $3.8 million was due to net new franchise restaurant development.

Other revenue increased by $1.7 million primarily due to an increase in vendor rebates.

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.

Advertising fees increased $7.8 million due to a 26.5% increase in system-wide sales during the fiscal third quarter 2023.

Company-owned restaurant sales increased $3.8 million, due to an increase of $2.1 million related to the addition of four net new company-owned restaurants since the prior fiscal third quarter.

The remainder of the increase was due to company-owned same store sales growth of 6.0%, which was driven primarily by an increase in transactions.

Cost of sales.

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.

During the thirteen weeks ended September 30, 2023, cost of sales was $17.6 million, an increase of $1.9 million, or 12.1%, compared to $15.7 million in the comparable period in 2022.

Cost of sales as a percentage of company-owned restaurant sales was 73.6% in the thirteen weeks ended September 30, 2023, compared to 78.0% in the comparable period in 2022.

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

Thirteen Weeks Ended

July 1, 2023 June 25, 2022

September 30, 2023 September 24, 2022

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

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Total cost of sales $ 17,622 73.6 % $ 15,724 78.0 %

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.

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 33.0% in the thirteen weeks ended September 30, 2023, compared to 37.2% in the comparable period in 2022.

This improvement was primarily due to a 13.5% 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.

Labor costs as a percentage of company-owned restaurant sales were 23.6% for the thirteen weeks ended September 30, 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 compared to the prior year, partially offset by sales leverage due to the company-owned domestic same store sales increase of 6.0%.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 19.4% for the thirteen weeks ended September 30, 2023 compared to 19.9% for the thirteen weeks ended September 24, 2022.

The decrease as a percentage of company-owned restaurant sales was primarily due to pre-opening expenses in the prior year period.

Advertising expenses.

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.

During the thirteen weeks ended September 30, 2023, advertising expenses were $42.4 million, an increase of $9.3 million compared to $33.1 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 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.

During the thirteen weeks ended September 30, 2023, SG&A expense was $23.0 million, an increase of $6.4 million compared to $16.7 million in the comparable period in 2022.

The increase in SG&A expense was driven by an increase in incentive compensation and performance-based stock compensation expense of $2.8 million primarily related to the Company’s current fiscal year performance, an increase in headcount related expenses of $1.7 million to support the growth in our business, and an increase in consulting fees of $1.3 million associated with the Company’s strategic initiatives.

Depreciation and amortization.

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.

During the thirteen weeks ended September 30, 2023, depreciation expense was $3.4 million, an increase of $0.5 million compared to $2.8 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 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.

During the thirteen weeks ended September 30, 2023, interest expense, net was $4.5 million, a decrease of $1.2 million compared to $5.7 million of interest expense, net in the comparable period in 2022.

The decrease was driven by $1.0 million in additional interest income earned during the thirteen weeks ended September 30, 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,

During the thirteen weeks ended September 30, 2023, we recognized income tax expense of $6.6 million yielding an effective tax rate of 25.4%, comparable to an effective tax rate of 25.9% in the prior year period.

Thirty-Nine Weeks Ended September 30, 2023 compared to Thirty-Nine Weeks Ended September 24, 2022

The following table sets forth our results of operations for the thirty-nine weeks ended September 30, 2023 and September 24, 2022 (dollars in thousands):

Thirty-Nine Weeks Ended Increase / (Decrease)

September 30,

2023 September 24,

Royalty revenue, franchise fees and other $ 149,372 $ 111,477 $ 37,895 34.0 %

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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%.

During the thirty-nine weeks ended September 30, 2023, total revenue was $333.0 million, an increase of $80.3 million, or 31.8%, compared to $252.7 million in the comparable period in 2022.

Royalty revenue, franchise fees and other increased $37.9 million, of which $17.7 million was due to domestic same store sales growth of 17.3%, and $12.1 million was due to net new franchise development.

Other revenue increased by $5.0 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.

Advertising fees increased $30.3 million, of which $24.1 million was due to the 28.2% increase in system-wide sales during the thirty-nine weeks ended September 30, 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 $12.1 million primarily due to an increase of $5.1 million related to the addition of four 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 7.2%, 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.

During the thirty-nine weeks ended September 30, 2023, cost of sales was $51.0 million, an increase of $4.7 million, or 10.1%, compared to $46.3 million in the comparable period in 2022.

Cost of sales as a percentage of company-owned restaurant sales was 73.2% in the thirty-nine weeks ended September 30, 2023, compared to 80.5% 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

Thirty-Nine Weeks Ended

September 30, 2023 September 24, 2022

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

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Total cost of sales $ 50,959 73.2 % $ 46,297 80.5 %

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.

Food, beverage and packaging costs as a percentage of company-owned restaurant sales were 32.6% in the thirty-nine weeks ended September 30, 2023, compared to 39.7% in the comparable period in 2022.

The decrease was primarily due to a 37.7% 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.

Labor costs as a percentage of company-owned restaurant sales were 24.0% for the thirty-nine weeks ended September 30, 2023, which was comparable to the thirty-nine weeks ended September 24, 2022.

An increase in company-owned restaurant wages as a percentage of sales was offset by sales leverage due to the company-owned domestic same store sales increase of 7.2%.

Other restaurant operating expenses as a percentage of company-owned restaurant sales were 19.1% for the thirty-nine weeks ended September 30, 2023, compared to 19.0% for the thirty-nine weeks ended September 24, 2022.

An increase related to the change in the national advertising fund contribution rate to 5% from 4% effective the first day of the fiscal second quarter 2022 was offset by a decrease in pre-opening expenses in the prior year period.

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.

During the thirty-nine weeks ended September 30, 2023, advertising expenses were $120.8 million, an increase of $34.8 million compared to $86.0 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.

During the thirty-nine weeks ended September 30, 2023, SG&A expense was $68.8 million, an increase of $20.1 million compared to $48.7 million in the comparable period in 2022.

The prior year-to-date period was impacted by the benefit of $4.1 million in stock awards forfeited during the second quarter in 2022.

In addition, incentive compensation and performance-based stock compensation expense increased $6.3 million primarily related to the Company’s current fiscal year performance, consulting fees increased $5.2 million associated with the Company’s strategic initiatives, and headcount related expenses increased $3.7 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.

During the thirty-nine weeks ended September 30, 2023, depreciation expense was $9.6 million, an increase of $2.0 million compared to $7.6 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.

During the thirty-nine weeks ended September 30, 2023, interest expense, net was $13.3 million, a decrease of $2.6 million compared to $15.9 million of interest expense, net in the comparable period in 2022.

The decrease was due to $4.0 million of additional interest income earned during the thirty-nine weeks ended September 30, 2023, partially offset by an increase of $1.4 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.

Loss on debt extinguishment was $0.8 million during the thirty-nine weeks ended September 24, 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.

During the thirty-nine weeks ended September 30, 2023, we recognized income tax expense of $18.0 million yielding an effective tax rate of 25.9%, compared to an effective tax rate of 23.1% in the prior year period.

The increase in the effective tax rate was primarily due to the impact of stock awards forfeited during the thirty-nine weeks ended September 24, 2022.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash provided from operating activities, cash and cash equivalents on hand, and borrowings available under our securitized financing facility.

Our primary requirements for liquidity and capital are working capital, general corporate needs, capital expenditures, income tax payments, debt service requirements, and dividend payments.

Our primary requirements for liquidity and capital are working capital, general corporate needs, capital expenditures, income tax payments, debt service requirements, dividend payments, and repurchasing shares of our common stock (if any).

Historically, we have operated with minimal positive working capital or with negative working capital.

We generally utilize available cash flows from operations to invest in our business, service our debt obligations, and pay dividends.

We generally utilize available cash flows from operations to invest in our business, service our debt obligations, pay dividends, and repurchase shares of our common stock (if any).

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

As of September 30, 2023, the Company had $78.0 million of cash and cash equivalents 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 twenty-six weeks ended July 1, 2023 and June 25, 2022 (in thousands):

Twenty-Six Weeks Ended

2023 June 25,

The following table shows summary cash flows information for the thirty-nine weeks ended September 30, 2023 and September 24, 2022 (in thousands):

Thirty-Nine Weeks Ended

September 30,

2023 September 24,

Net cash provided by (used in):

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Operating activities .

Our cash flow from operating activities are principally driven by sales at both franchise restaurants and company-owned restaurants, as well as franchise and development fees.

Our cash flows from operating activities are principally driven by sales at both franchise restaurants and company-owned restaurants, as well as franchise and development fees.

We collect franchise royalties from our franchise owners on a weekly basis.

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 $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.

Net cash provided by operating activities was $83.7 million in the thirty-nine weeks ended September 30, 2023, an increase of $30.6 million from cash provided by operating activities of $53.2 million in the thirty-nine weeks ended September 24, 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 $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.

Our net cash used in investing activities was $33.5 million in the thirty-nine weeks ended September 30, 2023, an increase of $16.9 million from cash used in investing activities of $16.6 million in the thirty-nine weeks ended September 24, 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 thirty-nine weeks ended September 30, 2023, and the sale of assets to franchisees during the prior fiscal year period.

Financing activities .

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.

Our net cash used in financing activities was $149.0 million in the thirty-nine weeks ended September 30, 2023, primarily related to the repurchase of approximately $125.0 million in common stock under our ASR Agreement, dividend payments of $18.4 million and repayment of long-term debt of $3.7 million.

Cash provided by financing activities of $109.4 million in the thirty-nine weeks ended September 24, 2022 was primarily related 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.

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 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.

No borrowings were outstanding under the 2022 Variable Funding Notes as of September 30, 2023.

During the third fiscal quarter of 2023, the Company continued to have 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 paid a quarterly cash dividend of $0.19 per share of common stock in each of the first two quarters of 2023, and a quarterly cash dividend of $0.22 per share of common stock in the third quarter of 2023, resulting in aggregate dividend payments of $18.0 million in the thirty-nine weeks ended September 30, 2023.

On October 31, 2023 the Company’s Board of Directors approved a dividend of $0.22 per share, to be paid on December 8, 2023 to stockholders of record as of November 17, 2023, totaling approximately $6.5 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.

However, any future declarations of dividends, as well as the amount and timing of such dividends, are subject to capital availability and the discretion of our Board of Directors, which must evaluate, among other things, whether cash dividends are in the best interest of the Company and our stockholders.

Share Repurchase Program.

On August 16, 2023, the Company’s Board of Directors approved a new share repurchase program with authorization to purchase up to $250.0 million of its outstanding shares of common stock.

On August 23, 2023, the Company entered into the ASR Agreement with a third-party financial institution to repurchase $125.0 million of the Company’s common stock as part of the Share Repurchase Authorization.

Under the ASR Agreement, the Company made an initial payment to the financial institution of $125.0 million in cash and received and retired an initial delivery of 567,151 shares of common stock, representing an estimated 75% of the total shares expected to be delivered under the ASR Agreement, based on the closing price on the date of initial delivery of $165.30.

The delivery of any remaining shares will occur at the final settlement of the transactions under the ASR Agreement, which is scheduled in the fiscal fourth quarter of 2023.

The number of shares to be delivered upon final settlement is based on the daily volume-weighted average share prices during the valuation period specified in the ASR Agreement, less a discount and subject to adjustments.

As of September 30, 2023, the Company had a total remaining authorized amount for share repurchases under the program of approximately $125.0 million.

Critical Accounting Policies and Estimates

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What changed 10-Q

Item 2. Management’s Discussion and Analysis