Business context and reporting period
The ONE Group Hospitality, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. It develops, operates, manages and licenses upscale restaurants and provides food-and-beverage services. At quarter-end, it reported 29 venues, including 19 STKs, and services at three hotels and one casino.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $23.6 | $20.3 | $46.4 | $39.8 |
| Operating income | $0.5 | $0.8 | $1.6 | $1.2 |
| Consolidated net income (loss) | ($0.2) | $0.3 | $0.6 | $0.4 |
| Net income (loss) attributable to ONE Group | ($0.3) | $0.2 | $0.5 | $0.4 |
| Operating margin | 2.0% | 3.8% | 3.5% | 3.1% |
| Adjusted EBITDA (non-GAAP) | $2.3 | $2.7 | $4.9 | $4.5 |
- Revenue and costs: Q2 revenue grew 16.3%, led by owned restaurant sales, up 21.3%; six-month revenue grew 16.6%. Q2 operating income fell as costs rose faster than revenue, including restaurant cost of sales and operating expenses.
- Cash flow: Six-month operating cash flow was $2.1 million, versus $2.3 million a year earlier. Capital spending was $2.9 million, and financing provided $0.3 million. Cash declined $0.8 million to $0.8 million, including a $0.3 million adverse currency effect.
- Balance sheet and liquidity: At June 30, cash was $0.8 million and current assets were $10.5 million against current liabilities of $15.6 million. Gross third-party debt was $12.7 million. The company had drawn $2.15 million of its $10 million revolving facility; a separate $10 million term loan was also provided under the credit agreement. Operating lease liabilities totaled $56.8 million.
- Margins and same-store sales: Management reported domestic SSS growth of 6.4% for Q2 and 7.5% for the first half; its owned-restaurant discussion separately reported growth of 7.8% and 9.1%, respectively. Owned STK store-level margins declined 340 basis points in Q2 and 70 basis points for the first half.
Material changes versus the prior comparable period
- New owned restaurants in San Diego and Nashville contributed to owned restaurant revenue growth; a licensed STK opened in Doha. Management cited sales growth at existing locations as well.
- Q2 operating income declined from $0.8 million to $0.5 million, while first-half operating income rose from $1.2 million to $1.6 million. General and administrative expense fell 5.3% for the first half, and its share of revenue decreased from 14.2% to 11.5%.
- Q2 included a $0.4 million loss on early debt extinguishment and $0.2 million of transaction costs. The debt loss related primarily to writing off unamortized discounts and issuance costs.
- In May 2019, the company refinanced and prepaid prior loans and notes, including $1.2 million owed to a related-party trust. Gross debt at June 30 was higher than at year-end, while the debt mix changed.
- Adoption of ASC 842 lease accounting on January 1 added $41.9 million of right-of-use assets and $58.9 million of lease liabilities at adoption, with no opening retained-earnings impact. The filing says the balance-sheet asset increase largely reflects this adoption.
Outlook, management commentary and risks
- Management expected 2019 domestic STK same-store sales growth of 4%–6%; reported first-half domestic SSS growth was 7.5%. It anticipated about $3.5 million of 2019 capital expenditures and said it expected to fund operations and planned openings for at least 12 months using operating cash, credit capacity and landlord allowances, subject to operating performance.
- The stated growth strategy emphasizes management and licensing, with a target of as many as three to five STK openings annually, subject to prospective licensee interest, suitable sites and available managers. Management also expected one to two new F&B hospitality agreements annually. Planned openings cited included licensed locations in Puerto Rico and Mexico, a managed Scottsdale STK, and an F&B location in Florence.
- Management attributed pressure on owned-restaurant margins partly to new locations, which typically have lower margins during their first 18 months. Q2 food-cost pressure also reflected premium shrimp costs and a higher food sales mix. Weaker sterling and euro reduced some international fee revenue.
- The new credit agreement matures in May 2024, bears variable interest, and includes leverage and fixed-charge-coverage covenants. The company said it was in compliance at June 30 and expected to remain compliant for the following 12 months based on current projections.
- Risks discussed include consumer demand and economic conditions, costs and competition, restaurant openings and closures, real estate availability, liquidity, execution of growth plans, currency effects, and litigation. The company faces ordinary-course lease and employee-related claims, including potential labor-law class actions; management did not expect current matters to materially affect results, while acknowledging outcomes are uncertain.
Most important facts for investors to verify
- Whether revenue growth converts into improved operating profitability, given Q2 operating-margin decline and weaker owned STK store-level margins.
- Cash generation, remaining revolver availability, debt service and continued compliance with credit covenants, especially with only $0.8 million of cash at quarter-end.
- Whether management’s SSS outlook and planned capital-light openings are achieved; reconcile the filing’s differing domestic SSS measures and definitions.
- The ongoing cost and cash implications of long-term lease commitments, including $56.8 million of recorded operating lease liabilities.
- Potential financial exposure from litigation, disputed rent and foreign-currency movements.