ONE Group Hospitality, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparative figures are for FY 2017. This is an annual report, not a quarterly filing. The company develops, operates, manages and licenses upscale restaurants and hospitality food-and-beverage services; STK is its primary brand. At year-end it reported 27 venues, including 17 STKs.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total revenue | $85.6 million | $79.7 million |
| Operating income (loss) | $5.8 million | $(2.7) million |
| Income (loss) before tax, continuing operations | $4.6 million | $(3.8) million |
| Net income (loss), consolidated | $3.9 million | $(4.0) million |
| Net income (loss) attributable to ONE Group | $3.3 million | $(4.2) million |
| Adjusted EBITDA | $11.4 million | $7.5 million |
| Cash from operating activities | $6.4 million | $6.0 million |
- Revenue grew 7.5%. Owned restaurant revenue rose 12.3% to $65.9 million; management, license and incentive fees rose 7.3% to $11.6 million. Owned food, beverage and other revenue fell 20.4% to $8.1 million, largely because a 2017 Super Bowl event did not recur.
- Domestic same-store sales increased 9.4% across eight comparable restaurants. Average check was $106.96 versus $104.50; average comparable restaurant volume was $11.0 million versus $10.1 million.
- Owned restaurant cost of sales declined to 26.1% of owned restaurant revenue from 26.5%; operating expenses declined to 60.1% from 63.2%. Management cited sales leverage and labor and spending efficiencies. Company-wide beverage sales were about 36% of restaurant sales.
- Cash and cash equivalents were $1.6 million at year-end. Working capital was negative by $6.2 million. Total debt was $10.8 million, including $3.2 million due within one year; interest expense, net, was $1.2 million. The company reported compliance with BankUnited financial covenants.
- Operating leases represented $102.8 million of future minimum payments, including $6.4 million due within one year. Total contractual obligations, including debt and estimated interest, were $115.5 million.
Changes, outlook and notable items
- Profitability improved from a FY 2017 loss to FY 2018 income, which management attributed to sales growth, improved existing-restaurant performance, new venues and cost efficiencies. General and administrative expense fell 6.5% to $11.1 million.
- FY 2018 included $0.2 million of gain on the sale of the company’s One 29 Park interest. In 2017, the company recorded $1.2 million in settlements, $2.2 million in lease termination expense and asset write-offs, and $0.6 million in impairments; these were not comparable recurring expenses.
- Adoption of ASC 606 reduced FY 2018 reported management, license and incentive fee revenue and net income by $0.3 million versus the prior accounting treatment. The company also recognized $0.2 million of gift-card breakage revenue. Approximately $0.4 million of the increase in fee revenue reflected accelerated recognition of deferred revenue related to the Ibiza license termination.
- Management expected domestic STK same-store sales growth of 3%–4% in 2019, versus 9.4% in 2018. It anticipated three to five annual STK openings, primarily through licensing or management, and one to two new F&B hospitality agreements annually. Planned 2019 openings included owned STK Nashville, licensed STK Doha, Puerto Rico and Guadalajara, managed STK Scottsdale, and managed F&B locations in London and Florence.
- Management expected to fund operations and planned growth for at least 12 months from operating cash flow and landlord construction allowances, while cautioning that financing may be needed and may not be available on acceptable terms. The filing gives two capital-spending measures: approximately $3.5 million of FY 2019 capital expenditures including maintenance, and $1.0–$1.5 million of anticipated expansion expenditures over the next 12 months net of improvement allowances.
- Adoption of lease accounting standard ASC 842 in 2019 was expected to add approximately $61–$70 million of lease liabilities and $44–$53 million of right-of-use assets; management did not expect a material effect on earnings or cash flows.
Risks, contingencies and controls
- Key risks include discretionary consumer spending and business travel, competition, restaurant-level execution and site availability, long-term lease commitments, labor and commodity cost inflation (beef was about 35% of food-and-beverage costs), food safety, weather, cybersecurity, foreign operations, and reliance on licensees and hospitality partners.
- Cash was modest relative to near-term debt payments and lease commitments; the company disclosed negative working capital and potential need for additional financing. Future liquidity depends on operating performance, landlord allowances and access to capital.
- The company reported ordinary-course litigation and noted settlements of California and New York wage-and-hour class actions, with the New York matter’s final payment made in 2018. Management said existing accruals were adequate and did not expect current matters to materially affect results, but litigation outcomes remain uncertain.
- Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2018, stating previously identified material weaknesses had been remediated. The independent auditor audited the financial statements but did not opine on internal-control effectiveness.
- The filing contains no specific earnings-per-share guidance. Forward-looking plans are subject to conditions including partner interest, suitable sites, permits, staffing and available capital.
Most important facts for investors to verify
- Whether sales growth and 2019 same-store sales expectations are sustained, and how much growth comes from comparable locations versus new openings.
- Cash generation, working-capital needs, the $3.2 million current debt portion, covenant headroom and availability of financing.
- Actual FY 2019 capital expenditures and progress on planned openings; reconcile the different stated capex measures and their scope.
- The effect of ASC 842 on reported assets, liabilities and lease-related disclosures, and the company’s capacity to meet long-term lease obligations.
- Underlying earnings quality, including ASC 606 timing effects, gift-card breakage, the Ibiza revenue item and other nonrecurring adjustments included in Adjusted EBITDA.