ONE Group Hospitality, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unless stated otherwise, financial amounts below are in U.S. dollars; millions are rounded. The company operates STK and Kona Grill restaurants and provides hospitality management and food-and-beverage services. It reported 63 venues in its business description, but a venue table totals 64; see investor verification items.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $83.4m | $81.1m | $165.9m | $155.3m |
| Operating income | $2.0m | $5.8m | $6.3m | $10.0m |
| Net income attributable to ONE Group | $0.6m | $4.3m | $3.2m | $8.0m |
| Diluted earnings per share | $0.02 | $0.13 | $0.10 | $0.23 |
| Adjusted EBITDA attributable to ONE Group | $8.5m | $10.4m | $19.4m | $21.1m |
| Restaurant operating profit (non-GAAP) | $11.9m | $12.8m | $24.8m | $25.8m |
- Q2 revenue increased 2.8%, as higher owned-restaurant sales from new locations more than offset lower management, license and incentive fees. Comparable restaurant sales fell 4.7% in Q2 (STK -6.8%; Kona Grill -1.5%). They were up 46.5% versus Q2 2019.
- Q2 operating margin fell to 2.5% from 7.1%; parent-attributable net margin was approximately 0.7% versus 5.3%. For the first half, operating margin was 3.8% versus 6.4% and parent-attributable net income was down to $3.2m from $8.0m.
- Restaurant operating profit margin declined to 14.9% in Q2 from 16.6%, and to 15.7% for the first half from 17.5%. Management cited wage inflation, growth-related staffing investment, marketing and other operating-cost inflation. Food-cost percentages improved, supported by product mix, pricing and cost initiatives.
- Q2 interest expense, net, rose to $1.6m from $0.4m; first-half expense rose to $3.4m from $1.0m. The increase primarily reflects the $50m delayed-draw borrowing and higher rates. The weighted-average borrowing rate was 11.77% at June 30, 2023, versus 10.31% at year-end 2022.
Cash flow, liquidity and debt
- Cash was $38.2m at June 30, down from $55.1m at December 31, 2022. Current assets were $56.1m and current liabilities $39.0m.
- First-half operating cash flow was $13.1m, compared with $14.9m a year earlier. Capital expenditures were $23.9m, versus $12.1m; operating cash flow less capital expenditures was approximately negative $10.8m. Financing used $6.2m, including $4.2m of share repurchases and $1.8m for employee tax withholding on vested shares.
- Debt principal totaled $74.0m, including the $50.0m delayed-draw term loan; its balance-sheet carrying amount, net of issuance costs and current portion, was $72.1m. The company also reported $10.6m available on its $12m revolver, subject to conditions, and $1.4m of standby letters of credit.
- Operating lease liabilities had a present value of $116.7m. Three future restaurant leases not yet commenced represented an estimated $6.1m of aggregate commitments, net of tenant-improvement allowances.
- The company said it expected operating cash flow and landlord construction allowances to fund operations and planned openings for at least 12 months, with potential revolver borrowing or equity issuance as additional sources. It reported compliance with credit-agreement covenants at June 30 and expected continued compliance based on current projections.
Outlook, developments and risks
- Management intended to open 8–12 venues in 2023. At filing, four company-owned STKs and one company-owned Kona Grill were under construction; construction of another Kona Grill was planned. A Kona Grill opened in Riverton, Utah, in July 2023, after quarter-end.
- First-half capital expenditures included $18.9m for new venues and $4.7m for existing restaurants. Pre-opening expenses increased to $2.9m from $1.1m, weighing on operating income; Q2 pre-opening expense was $1.6m versus $0.8m.
- Risks identified include execution and timing of openings, construction and landlord or regulatory delays, labor and commodity costs, supplier availability, customer behavior and competition, and the ability to improve restaurant performance and grow profitably. Management warned that forward-looking statements involve uncertainty.
- The company reported ordinary-course litigation, including lease disputes and employee matters, and said it did not expect current matters to have a material adverse effect. It cautioned that litigation outcomes are uncertain and a significant increase in claims or adverse outcomes could affect results. No material changes to the previously reported risk factors were disclosed.
- The board expanded the share repurchase authorization by $5m in May. The company repurchased approximately 0.5m shares for $3.4m in Q2; cumulative repurchases under the program were $11.3m by June 30. The program was scheduled to terminate in September 2024.
Important facts for investors to verify
- Reconcile the filing’s venue-count disclosures: the business summary says 63 venues and 25 Kona Grills, while the venue table lists 64 total venues and 26 Kona Grills.
- Track comparable sales and restaurant-level margins, particularly the effects of labor inflation and growth-related costs on STK and Kona Grill.
- Assess whether new openings meet management’s 2023 plan and generate returns sufficient to support elevated capital spending and pre-opening costs.
- Monitor cash usage, borrowing rates, revolver availability, covenant headroom and lease commitments as expansion proceeds.
- Review the non-GAAP reconciliations for Adjusted EBITDA and restaurant operating profit alongside GAAP operating income and net income.