Austin, Texas-based fast casual restaurant chain Schlotzsky’s, has reported results for its Q2 ended 30 June that reflect continued performance improvements by company-owned outlets.
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Q2 net income was US$489,000, or US$0.07 per diluted share, on revenues of US$15.9m. This compares with net income of US$751,000, or US$0.10 per diluted share, on revenues of US$16.1m, in the prior-year period.
For the H1, Schlotzsky’s reported net income of US$1.11m, or US$0.15 per diluted share, on revenues of US$31.1m. This compares with net income of US$1.34m, or US$0.18 per diluted share, on revenues of US$31.4m, in the prior-year period.
Schlotzsky’s explained that the decline in revenues was due primarily to comparisons to a record Q2 a year ago, less national television advertising than a year ago, and continued economic weakness in some of its key markets.
“We are solidly profitable, though affected by the economy, and we continue to invest in building our brand for the future,” insisted president and CEO John C. Wooley: “We have significant new restaurant development, technology, supply chain, and training initiatives underway. We’re making improvements to new restaurant designs, both for franchisees and our company-owned restaurants. We’re also strengthening our marketing team to help position for growth. We expect to see the benefits from these initiatives as the economy improves.”
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By GlobalDataCompany-owned outlets continue strong performance
Operating income from company-owned restaurants before depreciation and amortization increased 38.9%. Revenue increased 8.1% year on year, and during the Q2 the company acquired two additional restaurants, for a total of five more restaurants than it owned on 30 June 2001. Company-owned restaurants accounted for 52% of total revenues during the quarter, compared to 47.6% in the same period last year.
“A key part of our strategy is to develop a stronger base of company-owned restaurants to lead and support our franchisees and their growth. Just as important, we expect our company-owned restaurants to continue to deliver directly both to our revenue and profitability growth,” said Wooley.
The company currently operates 35 restaurants in 12 states, of which 20 were developed for or purchased from franchisees and are available for sale. The remaining 15 company-owned restaurants averaged US$27,754/week in the Q2. Wooley said the company will build new company-owned restaurants in up to 25 major US markets over the next few years. “These will be our larger restaurant design, which we believe can compete very well in the bakery/cafe arena and will be an important part of our franchise support infrastructure.”
Co-branding
“In addition to new restaurants within our system, co-branding opportunities have the potential to boost future royalty and licensing revenue and contribute to our advertising programme,” said Wooley. He said the company is interviewing potential co-branding partners.
“We believe that the pizza category offers Schlotzsky’s a good opportunity as our unique sandwiches complement their need for a stronger lunch daypart. We are also looking at chains that have minimal geographic conflict. We are particularly interested in the West, Northwest, East or Northeast.”
The firm anticipates purchasing its largest area developer territory later this month, to make co-branding in many key markets both more attractive and more feasible, said Wooley.
On 13 August, the company completed repayment of its commercial bank debt to the group led by Wells Fargo Bank by mortgage financing of certain real estate and restaurant property.
With those transactions complete, the company intends to exercise its option by 30 August to purchase the territory, which covers much of Texas and ten other states, primarily in the South and Midwest.
Condensed consolidated statements of income
(Unaudited)
Three Months Ended Six Months Ended
————————- ————————-
30 June 02 30 June 01 30 June 02 30 June 01
———— ———— ———— ————
Revenues
Royalties $ 5,264,312 $ 5,733,405 $ 10,383,799 $ 11,168,001
Franchise fees 42,000 35,000 62,000 185,000
Developer fees 60,034 85,566 120,067 170,048
Restaurant sales 8,269,362 7,648,059 16,140,254 15,064,202
Brands
contribution 1,991,130 1,967,129 3,874,157 3,696,146
Other fees
and revenue 276,294 594,595 568,679 1,127,529
———— ———— ———— ————
Total
revenues 15,903,132 16,063,754 31,148,956 31,410,926
———— ———— ———— ————
Expenses
Service costs:
Royalties 1,106,100 1,191,288 2,241,368 2,484,231
Franchise fees 15,955 17,500 25,955 77,500
———— ———— ———— ————
1,122,055 1,208,788 2,267,323 2,561,731
———— ———— ———— ————
Restaurant
operations:
Cost of sales 2,311,986 2,146,036 4,508,120 4,193,678
Personnel
and benefits 3,292,578 3,163,864 6,461,889 6,347,163
Operating
expenses 1,869,095 1,765,119 3,635,994 3,353,455
———— ———— ———— ————
7,473,659 7,075,019 14,606,003 13,894,296
———— ———— ———— ————
Equity loss
on investment 48,074 38,696 78,294 54,452
———— ———— ———— ————
General and
administrative 4,835,390 5,006,884 9,315,277 9,689,753
———— ———— ———— ————
Depreciation and
amortization 1,086,438 1,039,465 2,169,731 2,037,768
———— ———— ———— ————
Total
Expenses 14,565,616 14,368,852 28,436,628 28,238,000
———— ———— ———— ————
Income (loss)
from
operations 1,337,516 1,694,902 2,712,328 3,172,926
Other
Interest income 94,618 267,084 312,061 530,266
Interest
expense (655,436) (707,048) (1,257,962) (1,492,735)
———— ———— ———— ————
Income (loss)
before income
taxes 776,698 1,254,938 1,766,427 2,210,457
Provision (credit)
for income taxes 288,000 504,000 650,000 868,000
———— ———— ———— ————
Net income
(loss) $ 488,698 $ 750,938 $ 1,116,427 $ 1,342,457
============ ============ ============ ============
Earnings per common
share – basic $ 0.07 $ 0.10 $ 0.15 $ 0.18
============ ============ ============ ============
Earnings per common
share – diluted $ 0.07 $ 0.10 $ 0.15 $ 0.18
