Business context and reporting period
The ONE Group Hospitality, Inc. (Nasdaq: STKS) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company develops, operates, manages and licenses upscale and polished-casual restaurants and provides food-and-beverage services. Its main brands are STK and Kona Grill. At quarter-end it owned, operated, managed or licensed 58 venues. Management attributed the recovery in sales to eased dining restrictions and strong consumer demand; all domestic and international restaurants were open for in-person dining.
Financial highlights
Amounts below are in millions, except per-share data and percentages.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Total revenue | $70.8 | $16.7 | $121.2 | $57.4 |
| Operating income (loss) | $7.8 | ($5.3) | $8.6 | ($9.6) |
| Net income (loss) attributable to the company | $13.8 | ($2.9) | $13.9 | ($7.5) |
| Diluted earnings (loss) per share | $0.41 | ($0.10) | $0.41 | ($0.26) |
| Restaurant operating profit | $15.3 | $0.3 | $24.6 | $2.3 |
| Restaurant operating profit as % of owned restaurant revenue | 22.6% | 1.9% | 21.0% | 4.1% |
| Adjusted EBITDA attributable to the company | $12.9 | ($0.8) | $19.4 | $0.8 |
Q2 revenue rose 324.6% year over year; first-half revenue rose 111.3%. Comparisons are against periods heavily affected by COVID-19 restrictions. Management reported Q2 same-store sales growth of 324.1% year over year and 38.0% versus Q2 2019; the two-year increase was 54.3% for STK and 23.0% for Kona Grill. First-half same-store sales increased 110.3% year over year.
- Cash flow: First-half operating cash flow was $19.8 million, versus cash used of $4.9 million a year earlier. Investing cash outflow was $5.4 million, primarily for Bellevue construction, technology and existing restaurants. Financing cash inflow was $2.6 million, versus $17.8 million in the prior period, which included PPP loan proceeds. Cash increased $17.0 million to $41.4 million.
- Liquidity and debt: At June 30, cash was $41.4 million and current assets were $52.6 million versus current liabilities of $50.2 million. Long-term debt, including its current portion, was $47.2 million; $9.8 million of CARES Act loans also remained recorded as debt at quarter-end. The company had $10.7 million available under its revolving facility, subject to conditions. Operating lease liabilities totaled $101.0 million.
- Capital and shares: First-half capital expenditures were $5.4 million. Shares outstanding increased from 29.1 million at year-end 2020 to 31.9 million at June 30, 2021.
Material changes, outlook and risks
Improved revenue and restaurant-level profitability reflected reopened dining capacity, higher sales and operating-cost leverage. Q2 net income also included an $8.6 million noncash gain from forgiveness of the Kona Grill PPP loan. The remaining $9.8 million PPP loan was forgiven in July, after quarter-end; therefore, it was not included in Q2 earnings. First-half Adjusted EBITDA was $19.7 million before the reported $0.3 million attributable to noncontrolling interests, and the company’s measure excludes specified items, including the PPP forgiveness gain.
Management said it intended to open 13 new venues during 2021–2022, six of which were open by the filing’s reporting date. STK Bellevue opened in July 2021; one company-owned STK in Dallas and one managed STK in Stratford, UK were under development. Management expected operating cash flow and landlord construction allowances to fund operations and planned openings for at least the next 12 months, subject to operating performance. It cautioned that it could not predict whether post-pandemic sales and profitability would continue through the rest of 2021.
COVID-19 resurgence, renewed dining restrictions, customer behavior, hiring and employee retention, supply availability, commodity costs, and the timing and cost of new openings remain risks. Long-term leases and ongoing rent obligations are also material. The company reported $4.1 million of accrued lease-exit costs for unbuilt restaurants that remain in dispute with landlords. It stated that ordinary-course legal matters were not expected to have a material adverse effect, while acknowledging litigation outcomes are uncertain.
Subsequent financing: On August 6, 2021, the company amended its credit agreement, extending term-loan and revolver maturities to August 2026 and reducing the term-loan commitment from $48 million to $25 million. The amendment removed most financial covenants, retaining a maximum net leverage ratio of 2.00 to 1.00, and removed specified capital-expenditure and new-location restrictions. The filing says the company was compliant with its existing covenants at June 30.
Important facts for investors to verify
- Whether sales and restaurant-level margins remain strong against normalized, less pandemic-distorted comparisons.
- The sustainability of reported earnings after separating the $8.6 million Q2 PPP forgiveness gain and other adjustments.
- How the August credit-agreement amendment affects actual debt balances, interest expense, liquidity and covenant headroom.
- Whether planned openings meet timing and investment expectations, and how much capital the company must contribute.
- The effect of COVID-19 developments, labor and supply costs, rent obligations and unresolved lease disputes on cash flow.