ONE Group Hospitality, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. The company operates STK, Kona Grill and ONE Hospitality venues. At quarter-end it owned, operated, managed or licensed 63 venues. Financial amounts below are in U.S. dollars; “million” is abbreviated as “m.”
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Total revenue | $82.6m | $74.2m | Up 11.3% |
| Owned restaurant revenue | $78.6m | $70.5m | Up 11.4%, primarily from three venues opened since August 2022 |
| Management, license and incentive-fee revenue | $4.0m | $3.7m | Up 8.5% |
| Operating income | $4.3m | $4.2m | Operating margin was 5.2%, versus 5.7% |
| Net income | $2.3m | $3.5m | Net income attributable to the company was $2.6m, versus $3.7m; diluted EPS was $0.08, versus $0.11 |
| Operating cash flow | $6.6m | $9.8m | Lower primarily because of payments on accounts payable and accrued expenses |
| Capital expenditures | $11.9m | $4.5m | Primarily new venue construction and restaurant improvements |
- Same-store sales increased 1.6% overall; STK increased 5.3%, while Kona Grill decreased 4.3%.
- Restaurant operating profit was $12.9m, down from $13.0m; its margin on owned restaurant revenue fell to 16.4% from 18.5%. STK’s reported restaurant operating margin was 22.1%, versus 22.6%; Kona Grill’s was 8.1%, versus 13.7%.
- Owned restaurant cost of sales improved to 24.0% of owned restaurant revenue from 25.7%, attributed to product mix, pricing and cost initiatives, partly offset by inflation. Restaurant operating expenses rose to 59.6% from 55.8%, primarily due to wage and other cost inflation and new venue costs.
- Company-reported Adjusted EBITDA attributable to ONE Group was $10.9m, compared with $10.8m. This non-GAAP measure should not be treated as a substitute for GAAP results.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $48.7m at March 31, 2023, down from $55.1m at December 31, 2022. Current assets were $67.0m and current liabilities were $38.9m.
- Debt principal was $74.1m: $24.1m in term loans and $50.0m drawn on the delayed-draw facility. The balance-sheet carrying amount, net of issuance costs and current portion, was $71.3m, with $0.8m current. The company reported a weighted-average borrowing rate of 11.61%, versus 10.31% at year-end.
- The $12.0m revolving facility had $10.6m available, subject to conditions; $1.4m of standby letters of credit was outstanding. Debt matures in August 2026, and the company reported compliance with required covenants.
- Operating lease liabilities had a present value of $113.8m; finance lease liabilities had a present value of $0.9m. The filing also identifies $4.2m in present-value commitments for three operating leases not yet commenced.
- Cash declined by $6.4m during the quarter as operating cash flow and financing activity did not cover $11.9m of investing outflows. Financing cash use included $0.7m of share repurchases.
Material changes and notable items
- Revenue growth reflected STK San Francisco, STK Dallas and Kona Grill Columbus, which opened in August 2022, November 2022 and January 2023, respectively. The company opened Kona Grill Columbus during the quarter.
- Interest expense rose to $1.8m from $0.5m, primarily following the $50.0m delayed-draw borrowing in December 2022. The amended facility uses SOFR with a 1.00% floor plus a 6.50% margin.
- Pre-opening expense increased to $1.3m from $0.3m, primarily for Columbus and restaurants in development. Q1 2022 included $2.3m of COVID-19-related expense and $0.3m of lease-termination expense; neither was recorded in Q1 2023.
- Capital expenditures were $11.9m, including $9.1m for new venues and $2.7m for maintenance. Construction and development include STK locations in Charlotte, Boston and Washington, D.C., and Kona Grill locations in Riverton and Phoenix, among other projects.
- The company repurchased 118,085 shares for approximately $0.7m in the quarter. At March 31, about $2.1m remained under its $10.0m repurchase program.
Outlook, risks and contingencies
- Management intends to open 8–12 new venues in 2023. It expects to fund operations and currently planned openings for at least the next 12 months through operating cash flow and landlord construction allowances, with potential use of the revolver or equity also noted. This expectation is subject to operating performance and other conditions; the filing does not provide specific earnings or revenue guidance.
- Management cites risks including labor and operating-cost inflation, food and supply availability, new-venue opening timing and costs, customer demand, competition, regulation, and the ability to grow profitably. Forward-looking statements are subject to these and other uncertainties.
- The company is involved in ordinary-course claims, including lease disputes and employee-related matters. Management believes recorded accruals are adequate and does not expect current matters to have a material adverse effect, while noting litigation outcomes are uncertain.
- Management reported disclosure controls and procedures were effective as of March 31, 2023; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether same-store sales and restaurant-level margins stabilize, particularly at Kona Grill, and how wage and operating-cost inflation affects profitability.
- Whether the 2023 opening plan proceeds on schedule and within expected construction, pre-opening and capital-spending budgets.
- Cash generation, ongoing capital needs and liquidity after expansion spending, including availability and conditions on the revolver.
- Interest expense and covenant headroom under the floating-rate debt, as well as the company’s ability to service debt and substantial lease commitments.
- The outcome and financial exposure of litigation and other contingencies; management’s assessment is not a guarantee of resolution.