Driven Brands Holdings Inc. — Q3 2023 Form 10-Q
Reporting period: The quarter ended September 30, 2023 (13 weeks), compared with the 13 weeks ended September 24, 2022. Year-to-date results cover 39 weeks. Driven Brands operates approximately 5,000 locations across 49 U.S. states and 13 other countries; approximately 74% are franchised or independently operated.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $581.0 million | $516.6 million | $1,750.4 million | $1,493.5 million |
| Operating income (loss) | $(906.9) million | $95.8 million | $(732.1) million | $133.8 million |
| Net income (loss) | $(799.3) million | $38.4 million | $(731.8) million | $15.8 million |
| Diluted EPS | $(4.83) | $0.23 | $(4.41) | $0.09 |
| Adjusted EBITDA (non-GAAP) | $127.2 million | $129.4 million | $406.1 million | $383.3 million |
| Adjusted net income (non-GAAP) | $33.7 million | $55.0 million | $125.2 million | $162.4 million |
- Revenue rose 12% in Q3 and 17% year to date. System-wide sales grew 10% to $1.61 billion in Q3 and 15% to $4.77 billion year to date. Consolidated same-store sales increased 6.4% and 8.6%, respectively.
- Reported losses were driven primarily by an $851.0 million goodwill impairment in U.S. Car Wash and $111.2 million of Q3 asset impairment and lease-related charges. Year-to-date asset impairment charges were $117.5 million. The impairment charges are largely non-cash.
- Adjusted EBITDA declined 2% in Q3 but rose 6% year to date. Q3 adjusted EBITDA margin was 21.9%, versus 25.0% a year earlier; year-to-date margin was 23.2%, versus 25.7%. These are non-GAAP measures and should be considered alongside GAAP results.
- Q3 segment adjusted EBITDA increased in Maintenance to $86.5 million and Platform Services to $22.4 million, but declined in Car Wash to $24.4 million and Paint, Collision & Glass to $32.8 million. Year-to-date, Maintenance and Platform Services improved; Car Wash declined to $112.0 million.
- Interest expense was $41.3 million in Q3 and $120.3 million year to date, up 51% and 52%, respectively, reflecting higher rates and additional borrowings. The nine-month income tax benefit was $120.6 million, primarily reflecting impairment effects.
- Operating cash flow was $212.0 million for the first nine months, compared with $167.7 million. Capital expenditures were $482.6 million; investing cash outflow was $361.2 million. Financing provided $147.9 million, including net revolving-credit borrowings and $50.0 million of share repurchases.
- At September 30, cash and cash equivalents were $211.3 million. Reported total debt was $2.946 billion, including $215 million outstanding on the revolving credit facility; the balance-sheet carrying amount of long-term debt, net of issuance costs and current portion, was $2.877 billion. Total liquidity was $387 million, including cash and $176 million of undrawn capacity. An additional $135 million of variable-funding notes may be available subject to conditions.
- Total assets were $5.888 billion and shareholders’ equity was $880.9 million at September 30. Assets held for sale were $271.0 million. Operating lease liabilities were $1.335 billion.
Material changes and management commentary
- Following a strategic review of U.S. Car Wash, management approved closing 29 stores, halted new company-operated store openings, and began marketing certain properties and equipment for sale. Management expects sales of the assets held for sale over the next 12 months.
- Car Wash same-store sales remained negative: down 4.0% in Q3 and 6.7% year to date. Management cited softer U.S. demand, competition, adverse weather, and international political disruptions. Car Wash adjusted EBITDA fell 38% in Q3 and 25% year to date.
- Maintenance showed stronger sales and margins, with year-to-date adjusted EBITDA up 32%. Paint, Collision & Glass revenue grew, including through acquisitions, but management said integration and rebranding of Auto Glass Now acquisitions took longer than planned, reducing revenue and cost efficiencies; Q3 segment adjusted EBITDA declined 16%.
- The company added 55 net stores during Q3 and 188 during the first nine months. The share repurchase program, authorized for up to $50 million, was completed during Q3: 3.60 million shares repurchased at an average $13.87 per share.
Outlook, risks and other items
- No specific revenue, earnings, or other numeric full-year guidance is provided in the filing. Management stated that available liquidity and resources should be sufficient for operations, acquisitions, store development, and general corporate needs for at least the next 12 months, while noting access to capital could be affected by macroeconomic conditions, credit-rating changes, or weaker financial ratios.
- All debt covenants were in compliance at September 30, 2023. The company transitioned LIBOR-based loans to SOFR effective July 1, 2023; the amendment had no material impact on affected loans.
- Management cautioned that further impairment charges are possible if reporting units underperform. International Car Wash and Maintenance-Repair goodwill fair values exceeded carrying amounts by approximately 6% each, making results sensitive to discount-rate and revenue-growth assumptions. Certain other indefinite-lived trade names also had limited fair-value headroom.
- The company reported ordinary-course lawsuits, audits, and claims; management did not believe current proceedings would have a material adverse impact, but offered no assurance. The filing also notes a $4 million depreciation out-of-period adjustment, which management concluded was not material to prior periods or expected to be material for 2023.
- Subsequent to quarter-end, on October 30, 2023, certain IPO-era options and restricted stock awards were modified into time-based awards vesting in full on April 30, 2025, subject to continued service.
Important facts for investors to verify
- Whether Car Wash store closures, asset sales, and the suspension of new company-operated openings stabilize segment sales, margins, and cash requirements.
- Whether the $851 million goodwill impairment and $111 million Q3 asset charges fully reflect Car Wash valuation and closure risks, and whether additional impairments arise in other reporting units or trade names.
- Trends in same-store sales and adjusted margins—particularly in Car Wash and Paint, Collision & Glass—and progress on Auto Glass Now integration.
- Interest costs, revolving-facility usage, covenant headroom, and the company’s ability to fund substantial capital expenditures while maintaining liquidity.
- The assumptions and adjustments behind non-GAAP adjusted earnings and EBITDA, and the treatment and timing of assets held for sale and sale-leaseback obligations.