Market Overview

Del Taco Restaurants, Inc. Reports Fiscal Second Quarter 2018 Financial Results

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System-wide Comparable Restaurant Sales Increased 3.3%
Reaffirms
Annual Guidance on an Adjusted Basis

Increases Repurchase
Program by $25 million to $75 Million

Del Taco Restaurants, Inc. ("Del Taco" or the "Company"), (NASDAQ: TACO), the second largest Mexican-American quick service restaurant
chain by units in the United States, today reported fiscal second
quarter 2018 financial results. Additionally, the Company reaffirmed
guidance for fiscal year 2018 on an adjusted basis and announced a $25
million increase in its repurchase program for common stock and warrants
to $75 million.

Fiscal Second Quarter 2018 Highlights

  • System-wide comparable restaurant sales grew 3.3%, marking the 19th
    consecutive quarter of gains;
    • Company-operated comparable restaurant sales grew 2.5%, marking
      the 24th consecutive quarter of gains. Company-operated comparable
      restaurant sales growth was comprised of average check growth of
      3.7%, including approximately 1% of menu mix growth, offset by a
      transaction decrease of 1.2%;
    • Franchised comparable restaurant sales grew 4.2%;
  • Total revenue increased 8.5% to $117.8 million (including $3.1 million
    of franchise advertising contributions and $0.2 million of other
    franchise revenue required as part of the new revenue recognition
    rules adopted in the first fiscal quarter whereby the offsetting
    impact is an increase to expenses such that there is no impact on
    operating income and net income) compared to $108.6 million in the
    fiscal second quarter 2017;
  • Company restaurant sales increased 5.6% to $109.8 million compared to
    $104.0 million in the fiscal second quarter 2017;
  • Net income was $4.2 million, or $0.11 per diluted share, compared to
    $5.3 million in the fiscal second quarter 2017, or $0.13 per diluted
    share;
  • Adjusted net income* was $5.4 million, or $0.14 per diluted share,
    compared to $5.3 million in the fiscal second quarter 2017, or $0.13
    per diluted share;
  • Restaurant contribution* margin was 19.7% compared to 20.3% in the
    fiscal second quarter 2017; and
  • Adjusted EBITDA* was $16.8 million compared to $17.0 million in the
    fiscal second quarter 2017.

Adjusted net income*, Restaurant contribution*, and Adjusted EBITDA*
are non-GAAP measures and defined below under "Key Financial
Definitions". Please see the reconciliation of non-GAAP measures
accompanying this release.

John D. Cappasola, Jr., President and Chief Executive Officer of Del
Taco, commented, "During the quarter we were proud to achieve our
company average unit volume (AUV) goal of $1.5 million on a trailing 12
month basis, that we set following our entrance to the public markets
several years ago. Since fiscal 2013 our company and franchise AUV's
have each grown by more than 25%, helping us achieve enhanced unit
economics that are driving company and franchise growth opportunities."

Cappasola continued, "Our second quarter was in line with our
expectations and we remain on track to achieve our annual guidance on an
adjusted basis. We are particularly pleased with our system-wide
comparable restaurant sales growth of 3.3%, or 10.4% on a two-year
basis, and our restaurant contribution margin performance, which
improved sequentially in the quarter, contracting only 10 basis points
after adjusting for the timing of advertising expenses.

Cappasola concluded, "Early in the third quarter we launched Elevated
Combined Solutions which includes brand catalysts and operational
improvements designed to further our mission to be the category leader
in the value oriented QSR+ segment. This latest iteration of our pivotal
brand strategy includes a new concept tagline – Fresh Mexican Grill, a
new holistic advertising campaign ‘Celebrating the Hardest Working Hands
in Fast Food', reimagined packaging, enhanced hospitality initiatives,
newly designed menu boards, new kitchen equipment and updated crew
uniforms. Early guest feedback on these enhancements has been positive."

Review of Fiscal Second Quarter 2018 Financial Results

Total revenue increased 8.5% to $117.8 million (including $3.1 million
of franchise advertising contributions and $0.2 million of other
franchise revenue required as part of the new revenue recognition rules
adopted in the first fiscal quarter whereby the offsetting impact is an
increase to expenses such that there is no impact on operating income
and net income) compared to $108.6 million in the fiscal second quarter
2017. Excluding these revenue recognition impacts total revenue
increased 5.4%.

Comparable restaurant sales increased 3.3% system-wide, resulting in a
10.4% increase on a two-year basis. The Del Taco system has now
generated comparable restaurant sales growth for 19 consecutive
quarters. Company-operated comparable restaurant sales increased 2.5%,
marking 24 consecutive quarters of comparable restaurant sales growth.
Franchise comparable restaurant sales increased 4.2%.

Net income was $4.2 million, representing $0.11 per diluted share,
compared to $5.3 million in the fiscal second quarter 2017, representing
$0.13 per diluted share.

Adjusted net income* was $5.4 million, or $0.14 per diluted share,
compared to $5.3 million in the fiscal second quarter 2017, or $0.13 per
diluted share. Adjusted net income excludes the impairment of long-lived
assets charge totaling approximately $1.7 million, or approximately $1.2
million after the related tax impact, representing $0.04 per diluted
share, or $0.03 per diluted share after the related tax impact.

Restaurant contribution* was $21.7 million compared to $21.1 million in
the fiscal second quarter 2017. As a percentage of Company restaurant
sales, restaurant contribution margin decreased approximately 60 basis
points year-over-year to 19.7%. The decrease was the result of an
approximate 40 basis point increase in labor and related expenses and an
approximate 50 basis point increase in occupancy and other operating
expenses, which was all related to the timing of advertising expenses.
These increases were partially offset by a 30 basis point decrease in
food and paper costs.

Adjusted EBITDA* was $16.8 million compared to $17.0 million in the
fiscal second quarter 2017.

Restaurant Portfolio

During the fiscal second quarter 2018, we opened one company-operated
restaurant and one franchised restaurant, and closed one
company-operated restaurant and one franchised restaurant.

Thus far in the fiscal third quarter 2018, our franchise partners have
opened one restaurant and there are currently 16 restaurants (eight
franchised and eight company) under construction, all of which are
expected to open this fiscal year. The remaining restaurants expected to
open in fiscal year 2018 are expected to commence construction within
the next two months.

Repurchase Program for Common Stock and Warrants

On July 23, 2018, the Board of Directors increased the repurchase
program for Del Taco's common stock and warrants to $75 million (raised
from $50 million). The increased authorization will expire upon
completion of the repurchase program unless terminated earlier by the
Board of Directors.

During the fiscal second quarter 2018, we repurchased 407,821 shares of
common stock at average price of $11.57 per share for a total of $4.7
million, and repurchased 11,132 warrants at an average price per warrant
of $2.68.

There are currently 38,299,842 common shares and 5,978,991 warrants
outstanding and approximately $41.2 million remains under the $75
million authorization.

Fiscal Year 2018 Guidance

We are reiterating the following guidance for fiscal year 2018, the
52-week period ending January 1, 2019:

  • System-wide same store sales growth of approximately 2% to 4%;
  • Total revenue between $506 million and $516 million, reflecting the
    new revenue recognition rules whereby franchise advertising
    contributions and other franchise revenue, which totaled $12.7 million
    and $0.8 million in fiscal year 2017, respectively, will now be
    reported on a gross basis. This guidance also includes an estimated
    $0.5 million unfavorable impact from the timing of initial franchise
    fees and renewal fees which must be deferred and recognized over the
    term of the related franchise agreement;
  • Total company-operated restaurant sales between $473 million and $483
    million;
  • Restaurant contribution margin between 19.3% and 19.8%;
  • General and administrative expenses between approximately 8.2% and
    8.5% of total revenue, including the expense side of the other
    franchise revenue that will now be reported on a gross basis;
  • Effective tax rate of approximately 26.5% to 27.5%;
  • Adjusted diluted earnings per share of approximately $0.59 to $0.63;
  • Adjusted EBITDA between $71.5 million and $74.0 million;
  • 25 to 28 new system-wide restaurant openings; and
  • Net capital expenditures between $35.0 million to $38.0 million.

We have not reconciled guidance for Adjusted diluted earnings per share
and Adjusted EBITDA to the corresponding GAAP financial measure because
we do not provide guidance for the various reconciling items. We are
unable to provide guidance for these reconciling items because we cannot
determine their probable significance, as certain items are outside of
our control and cannot be reasonably predicted since these items could
vary significantly from period to period. Accordingly, a reconciliation
to the corresponding GAAP financial measure is not available without
unreasonable effort.

Conference Call

A conference call and webcast to discuss Del Taco's financial results
and annual guidance is scheduled for 5:00 p.m. ET today. Hosting the
conference call and webcast will be John D. Cappasola, Jr., President
and Chief Executive Officer; and Steven L. Brake, Executive Vice
President and Chief Financial Officer.

Interested parties may listen to the conference call via telephone by
dialing 631-891-4304. A telephone replay will be available shortly after
the call has concluded and can be accessed by dialing 412-317-6671, the
passcode is 10005217.

The webcast will be available at www.deltaco.com
under the investors section and will be archived on the site shortly
after the call has concluded.

Key Financial Definitions

Comparable restaurant sales growth reflects the change in
year-over-year sales for the comparable company, franchise and total
system restaurant base. Restaurants are included in the comparable store
base in the accounting period following its 18th full month
of operations and excludes restaurant closures.

Restaurant contribution* is defined as company restaurant sales
less restaurant operating expenses, which are food and paper costs,
labor and related expenses and occupancy and other operating expenses. Restaurant
contribution margin
is defined as restaurant contribution as a
percentage of company restaurant sales. Restaurant contribution and
restaurant contribution margin are neither required by, nor
presented in accordance with, GAAP. Restaurant contribution and
restaurant contribution margin are supplemental measures of operating
performance of restaurants and the calculations thereof may not be
comparable to those reported by other companies. Restaurant contribution
and restaurant contribution margin have limitations as analytical tools,
and you should not consider them in isolation or as substitutes for
analysis of results as reported under U.S. GAAP. Management believes
that restaurant contribution and restaurant contribution margin are
important tools for investors because they are widely-used metrics
within the restaurant industry to evaluate restaurant-level
productivity, efficiency and performance. Management uses restaurant
contribution and restaurant contribution margin as key performance
indicators to evaluate the profitability of incremental sales at Del
Taco restaurants, to evaluate restaurant performance across periods and
to evaluate restaurant financial performance compared with competitors.

Adjusted EBITDA* is defined as net income/loss prior to interest
expense, income taxes, and depreciation and amortization, as adjusted to
add back certain charges, such as stock-based compensation expense and
transaction-related costs, as these expenses are not considered an
indicator of ongoing company performance. Adjusted EBITDA is a non-GAAP
financial measure and should not be considered as an alternative to
operating income or net income/loss as a measure of operating
performance or cash flows or as measures of liquidity. Non-GAAP
financial measures are not necessarily calculated the same way by
different companies and should not be considered a substitute for or
superior to GAAP results. We believe Adjusted EBITDA facilitates
operating performance comparisons from period to period by isolating the
effects of some items that vary from period to period without any
correlation to core operating performance or that vary widely among
similar companies. These potential differences may be caused by
variations in capital structures (affecting interest expense), tax
positions (such as the impact on periods or changes in effective tax
rates or net operating losses) and the age and book depreciation of
facilities and equipment (affecting relative depreciation expense). We
also present Adjusted EBITDA because (i) we believe this measure is
frequently used by securities analysts, investors and other interested
parties to evaluate companies in our industry and (ii) we use Adjusted
EBITDA internally as a benchmark to compare performance to that of
competitors.

Adjusted net income* represents company net income before
impairment of long-lived assets, net of tax. Adjusted diluted net
income per share
represents company diluted net income per share
before impairment of long-lived assets, net of tax.

About Del Taco Restaurants, Inc.

Del Taco (NASDAQ:TACO) offers a unique variety of both Mexican and
American favorites such as burritos and fries, prepared fresh in every
restaurant's working kitchen with the value and convenience of a
drive-thru. Del Taco's menu items taste better because they are made
with quality ingredients like fresh grilled chicken and carne asada
steak, hand-sliced avocado, hand-grated cheddar cheese, slow-cooked
beans made from scratch, and creamy Queso Blanco. Del Taco's new
advertising campaign, "Celebrating the Hardest Working Hands in Fast
Food," further communicates the company's commitment to providing guests
with fresh, quality food prepared by hand every day. Founded in 1964,
today Del Taco serves more than three million guests each week at its
more than 560 restaurants across 14 states. For more information, visit www.deltaco.com.

Forward-Looking Statements

In addition to historical information, this release may contain a number
of "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include,
without limitation, information concerning Del Taco's possible or
assumed future results of operations, business strategies, competitive
position, industry environment, potential growth opportunities and the
effects of regulation. These statements are based on Del Taco's
management's current expectations and beliefs, as well as a number of
assumptions concerning future events. When used in this press release,
the words "estimates," "projected," "expects," "anticipates,"
"forecasts," "plans," "intends," "believes," "seeks," "target," "may,"
"will," "should," "future," "propose," "preliminary," "guidance," "on
track" and variations of these words or similar expressions (or the
negative versions of such words or expressions) are intended to identify
forward-looking statements. Such forward-looking statements are subject
to known and unknown risks, uncertainties, assumptions and other
important factors, many of which are outside Del Taco's management's
control that could cause actual results to differ materially from the
results discussed in the forward-looking statements. These risks
included, without limitation, consumer demand, our inability to
successfully open company-operated or franchised restaurants or
establish new markets, competition in our markets, our inability to grow
and manage growth profitably, adverse changes in food and supply costs,
our inability to access additional capital, changes in applicable laws
or regulations, food safety and foodborne illness concerns, our
inability to manage existing and to obtain additional franchisees, our
inability to attract and retain qualified personnel, our inability to
profitably expand into new markets, changes in, or the discontinuation
of, the Company's repurchase program, and the possibility that we may be
adversely affected by other economic, business, and/or competitive
factors. Additional risks and uncertainties are identified and discussed
in Del Taco's reports filed with the SEC, including under Item 1A. Risk
Factors in our Annual Report on Form 10-K for the year ended January 2,
2018, and available at the SEC's website at www.sec.gov
and the Company's website at www.deltaco.com.

Forward-looking statements included in this release speak only as of the
date of this release. Del Taco undertakes no obligation to update its
forward-looking statements to reflect events or circumstances after the
date of this release or otherwise.

Del Taco Restaurants, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
   
June 19, 2018 January 2, 2018
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 13,146 $ 6,559
Accounts and other receivables, net 3,269 3,828
Inventories 2,710 2,712
Prepaid expenses and other current assets   2,667   6,784
Total current assets 21,792 19,883
Property and equipment, net 161,883 156,124
Goodwill 320,638 320,638
Trademarks 220,300 220,300
Intangible assets, net 20,006 21,498
Other assets, net   4,498   3,881
Total assets $ 749,117 $ 742,324
 
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 17,608 $ 18,759
Other accrued liabilities 37,319 35,257

Current portion of capital lease obligations and deemed landlord
financing
liabilities

 

  1,194   1,415
Total current liabilities 56,121 55,431
Long-term debt, capital lease obligations and deemed landlord
financing

liabilities, excluding current portion, net

170,324 170,639
Deferred income taxes 68,896 68,574
Other non-current liabilities   32,604   31,431
Total liabilities 327,945 326,075
 
Shareholders' equity:

Preferred stock, $0.0001 par value; 1,000,000 shares authorized;
no shares
issued and outstanding

 

Common stock, $0.0001 par value; 400,000,000 shares authorized;
38,091,165
shares issued and outstanding at June 19, 2018; 38,434,274
shares
issued and outstanding at January 2, 2018

 

4 4
Additional paid-in capital 347,220 349,334
Accumulated other comprehensive income 319 14
Retained earnings   73,629   66,897
Total shareholders' equity   421,172   416,249
Total liabilities and shareholders' equity $ 749,117 $ 742,324
Del Taco Restaurants, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands, except share and per share data)
       
12 Weeks Ended 24 Weeks Ended
June 19, 2018 June 20, 2017 June 19, 2018 June 20, 2017
Revenue:
Company restaurant sales $ 109,800 $ 104,022 $ 214,909 $ 205,244
Franchise revenue 4,149 3,903 7,941 7,516
Franchise advertising contributions 3,136 6,072
Franchise sublease income   728     656     1,445     1,166  
Total revenue 117,813 108,581 230,367 213,926
Operating expenses:
Restaurant operating expenses:
Food and paper costs 30,082 28,770 59,055 56,688
Labor and related expenses 35,422 33,185 70,240 66,406
Occupancy and other operating expenses 22,627 20,918 44,613 41,636
General and administrative 10,321 9,055 20,750 18,360
Franchise advertising expenses 3,136 6,072
Depreciation and amortization 5,847 5,278 11,761 10,381
Occupancy and other - franchise subleases 651 602 1,289 1,083
Pre-opening costs 199 151 641 177
Impairment of long-lived assets 1,661 1,661
Restaurant closure charges, net (24 ) 6 (37 ) 15
Loss on disposal of assets, net   87     340     180     291  
Total operating expenses   110,009     98,305     216,225     195,037  
Income from operations 7,804 10,276 14,142 18,889
Other expense
Interest expense   2,012     1,627     3,922     3,170  
Total other expense   2,012     1,627     3,922     3,170  
Income from operations before provision for income taxes 5,792 8,649 10,220 15,719
Provision for income taxes   1,582     3,319     2,781     6,151  
Net income 4,210 5,330 7,439 9,568
Other comprehensive income (loss):
Change in fair value of interest rate cap, net of tax 115 (148 ) 289 (236 )
Reclassification of interest rate cap amortization included in

net income

  10         16      
Total other comprehensive income (loss)   125     (148 )   305     (236 )
Comprehensive income $ 4,335   $ 5,182   $ 7,744   $ 9,332  
Earnings per share:
Basic $ 0.11 $ 0.14 $ 0.19 $ 0.25
Diluted $ 0.11 $ 0.13 $ 0.19 $ 0.24
Weighted-average shares outstanding
Basic 38,299,483 38,535,855 38,370,595 38,769,895
Diluted 38,643,873 39,808,485 38,938,106 40,094,476
Del Taco Restaurants, Inc.
Reconciliation of Net Income to EBITDA and Adjusted EBITDA
(Unaudited)
(In thousands)
       
12 Weeks Ended 24 Weeks Ended
June 19, 2018 June 20, 2017 June 19, 2018 June 20, 2017
Net income $ 4,210 $ 5,330 $ 7,439 $ 9,568
Non-GAAP adjustments:
Provision for income taxes 1,582 3,319 2,781 6,151
Interest expense 2,012 1,627 3,922 3,170
Depreciation and amortization   5,847     5,278     11,761     10,381  
EBITDA   13,651     15,554     25,903     29,270  
Stock-based compensation expense (a) 1,360 1,080 2,634 2,149
Loss on disposal of assets, net (b) 87 340 180 291
Restaurant closure charges, net (c) (24 ) 6 (37 ) 15
Amortization of favorable and unfavorable lease assets and
liabilities, net (d)
(132 ) (145 ) (250 ) (292 )
Pre-opening costs (e) 199 151 641 177
Impairment of long-lived assets (f)   1,661         1,661      
Adjusted EBITDA $ 16,802   $ 16,986   $ 30,732   $ 31,610  

(a)

 

Includes non-cash, stock-based compensation.

(b)

Loss on disposal of assets, net includes the loss or gain on
disposal of assets related to sales, retirements and replacement
or write-off of leasehold improvements or equipment in the
ordinary course of business, net of amortization of deferred gains
on asset sales associated with sale-leaseback transactions and
gains or losses recorded associated with the sale of
company-operated stores to franchisees.

(c)

Includes sublease income from leases which are treated as deemed
landlord financing, partially offset by costs related to future
obligations associated with the closure or net sublease shortfall
of a restaurant.

(d)

Includes amortization of favorable lease assets and unfavorable
lease liabilities.

(e)

Pre-opening costs consist of costs directly associated with the
opening of new restaurants and incurred prior to opening,
including restaurant labor, supplies, cash and non-cash rent
expense and other related pre-opening costs. These are generally
incurred over the three to five months prior to opening.

(f)

Includes costs related to impairment of long-lived assets.

Del Taco Restaurants, Inc.
Reconciliation of Company Restaurant Sales to Restaurant
Contribution
(Unaudited)
(In thousands)
       
12 Weeks Ended 24 Weeks Ended
June 19, 2018 June 20, 2017 June 19, 2018 June 20, 2017
Company restaurant sales $ 109,800 $ 104,022 $ 214,909 $ 205,244
Restaurant operating expenses   88,131   82,873   173,908   164,730
Restaurant contribution $ 21,669 $ 21,149 $ 41,001 $ 40,514
Restaurant contribution margin   19.7 %   20.3 %   19.1 %   19.7 %
Del Taco Restaurants, Inc.
Reconciliation of Net Income and Diluted Earnings Per Share to
Adjusted Net Income and Adjusted Diluted Earnings Per Share
(Unaudited)
(In thousands, except per share data)
       
 
12 Weeks Ended 12 Weeks Ended
June 19, 2018 June 20, 2017
$ Per Share $ Per Share
Net income and diluted earnings per share, as reported $ 4,210 $ 0.11 $ 5,330 $ 0.13
Impairment of long-lived assets (a) 1,661 0.04
Tax impact of adjustment (b)   (449 )   (0.01 )    
Non-GAAP adjusted net income and adjusted diluted earnings per share $ 5,422   $ 0.14   $ 5,330 $ 0.13
 
 
24 Weeks Ended 24 Weeks Ended
June 19, 2018 June 20, 2017
$ Per Share $ Per Share
Net income and diluted earnings per share, as reported $ 7,439 $ 0.19 $ 9,568 $ 0.24
Impairment of long-lived assets (a) 1,661 0.04
Tax impact of adjustment (b)   (449 )   (0.01 )    
Non-GAAP adjusted net income and adjusted diluted earnings per share $ 8,651   $ 0.22   $ 9,568 $ 0.24

(a)

 

Includes costs related to impairment of long-lived assets.

(b)

Represents the income tax associated with the impairment
adjustment.

Del Taco Restaurants, Inc.
Restaurant Development
       
12 Weeks Ended 24 Weeks Ended
June 19, 2018 June 20, 2017 June 19, 2018 June 20, 2017
Company-operated restaurant activity:
Beginning of period 315 305 312 310
Openings 1 1 4 1
Closures (1 ) (2 ) (1 ) (2 )
Sold to franchisees       (5 )
Restaurants at end of period 315   304   315   304  
Franchise-operated restaurant activity:
Beginning of period 251 249 252 241
Openings 1 2 1 5
Closures (1 ) (2 )
Purchased from Company       5  
Restaurants at end of period 251   251   251   251  
Total restaurant activity:
Beginning of period 566 554 564 551
Openings 2 3 5 6
Closures (2 ) (2 ) (3 ) (2 )
Restaurants at end of period 566   555   566   555  

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