Driven Brands Holdings Inc. — Q1 2023 Form 10-Q
Business context and reporting period. The unaudited quarter ended April 1, 2023, comprised 13 weeks; the comparable quarter ended March 26, 2022, also comprised 13 weeks. Driven Brands operates more than 4,800 automotive-service locations across 49 U.S. states and 13 other countries, with approximately 75% of locations franchised or independently operated.
Key financial results
| Metric | Q1 2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $562.5 million | $468.3 million | +20% |
| Operating income | $77.2 million | $73.7 million | +5% |
| Net income attributable to Driven Brands | $29.7 million | $34.4 million | −14% |
| Diluted EPS | $0.17 | $0.20 | −15% |
| Adjusted net income attributable to Driven Brands (non-GAAP) | $42.3 million | $47.8 million | −11% |
| Adjusted EBITDA (non-GAAP) | $127.8 million | $118.5 million | +8% |
| Operating cash flow | $36.8 million | $9.0 million | Increased |
| Capital expenditures | $169.2 million | $69.0 million | Increased |
Revenue growth reflected same-store sales gains, store additions and acquisitions. Consolidated same-store sales rose 9.0%, versus 15.6% in the prior-year quarter. Operating income increased, but operating margin declined to approximately 13.7% from 15.7%. Adjusted EBITDA margin was 22.7%, compared with 25.3%. Interest expense rose 50% to $38.1 million; the effective tax rate was 26.9%, versus 27.4%.
Segment trends
- Maintenance: Revenue increased 27% to $227.7 million and Segment Adjusted EBITDA rose 39% to $73.0 million; same-store sales increased 12.6%.
- Car Wash: Revenue declined 1% to $157.0 million and Segment Adjusted EBITDA fell to $44.3 million from $55.7 million; same-store sales declined 11.3%.
- Paint, Collision & Glass: Revenue rose 52% to $120.8 million, with acquisitions contributing to company-operated sales growth; Segment Adjusted EBITDA increased 23% to $35.7 million. Same-store sales rose 14.1%.
- Platform Services: Revenue increased 21% to $52.0 million and Segment Adjusted EBITDA rose 20% to $17.0 million; same-store sales declined 5.0%.
Financial position, liquidity and cash flow
- Cash and cash equivalents were $190.8 million at quarter-end, down from $227.1 million at December 31, 2022.
- Total debt was $2.892 billion, up from $2.784 billion at year-end; $115 million was outstanding on the revolving credit facility. Long-term debt, net of issuance costs and current maturities, was $2.816 billion.
- Operating lease liabilities were $1.202 billion. The company reported total liquidity of $466 million, including cash and available borrowing capacity; this excludes additional potential Series 2022-1 variable-funding capacity of $135 million, subject to conditions.
- Investing activities used $181.7 million, including $169.2 million of capital expenditures and $29.3 million for acquisitions, partly offset by $16.8 million of sale-leaseback proceeds. Financing activities provided $108.5 million, primarily from net revolving-credit borrowings.
- Debt agreements contain covenants; the company reported compliance as of April 1, 2023.
Material changes, outlook and risks
Management attributed lower net income and adjusted net income primarily to reduced company-operated store margins, particularly in Car Wash, and higher interest expense. Higher variable rates on the term loan and interest on securitization notes issued in late 2022 contributed to the interest increase. Car Wash profitability was also affected by weaker same-store sales and higher operating, compensation and rent costs. Higher depreciation and amortization reflected acquisitions and capital investment.
The company added 59 net stores during the quarter and said it expects cash from operations, borrowings and revolving facilities to fund operations, acquisitions, store development and general needs for at least the next 12 months. No specific financial guidance for the remainder of 2023 is provided in the supplied filing text. Management cautions that access to capital could be affected by macroeconomic conditions, credit-rating changes or deterioration in financial ratios.
During the quarter, the company completed acquisitions representing three sites for approximately $13 million in aggregate consideration. It also sold and leased back six properties for $17 million, recording a net gain of $3 million; related operating leases have 20-year terms. The tax receivable agreement entitles pre-IPO shareholders to 85% of certain realized tax savings; recorded liabilities totaled approximately $172 million. The company disclosed ordinary-course lawsuits and claims, stating it did not currently believe they would have a material adverse impact, while noting outcomes cannot be assured.
Important facts for investors to verify
- Whether Car Wash same-store sales and segment margins stabilize after the sharp year-over-year deterioration.
- How higher interest rates and additional borrowing affect interest expense, leverage and liquidity.
- Whether elevated capital spending generates expected returns and how store openings and acquisitions contribute to comparable growth.
- The composition and sustainability of non-GAAP adjustments; the filing reports Adjusted EBITDA of $127.8 million in its reconciliation and approximately $128 million in highlights, while Segment Adjusted EBITDA totals $128.9 million.
- Future cash requirements under the tax receivable agreement, debt covenants and long-term lease commitments.