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IRG > SEC Filings for IRG > Form 10-K on 5-Mar-2014All Recent SEC Filings

Show all filings for IGNITE RESTAURANT GROUP, INC.

Form 10-K for IGNITE RESTAURANT GROUP, INC.


5-Mar-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with "Selected Historical Consolidated Financial and Operating Data," and the historical financial statements and related notes included in this annual report on Form 10-K. The statements in this discussion regarding industry outlook, our expectations regarding our future performance, liquidity and capital resources and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Risk Factors" and "Forward-Looking Statements" included in this report. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Our fiscal year ends on the Monday nearest to December 31 of each year. Fiscal years 2012 and 2011 were 52-week years, while fiscal year 2010 was a 53-week year. References to fiscal years 2013, 2012 and 2011 are references to fiscal years ended December 30, 2013, December 31, 2012 and January 2, 2012, respectively. Prior to fiscal year 2013, the first three quarters of our fiscal year consist of 12 weeks and our fourth quarter consists of 16 weeks for 52-week fiscal years and 17 weeks for 53-week fiscal years.


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Commencing in fiscal year 2013, we changed our quarterly accounting periods to be comprised of 13 weeks, except for 53-week fiscal years for which the fourth quarter will be comprised of 14 weeks.

Overview

Ignite Restaurant Group, Inc. operates three restaurant brands in the casual dining segment, Joe's Crab Shack ("Joe's"), Brick House Tavern + Tap ("Brick House") and Romano's Macaroni Grill ("Macaroni Grill"). Each of our restaurant brands offers a variety of high-quality food in a distinctive, casual, high-energy atmosphere. Joe's, Brick House and Macaroni Grill operate in a diverse set of markets across the United States and internationally. As of December 30, 2013, we owned and operated 136 Joe's, 20 Brick House and 179 Macaroni Grill restaurants in 36 states, and franchised 24 Macaroni Grill restaurants within the United States and foreign countries.

Joe's Crab Shack is an established, national chain of casual dining seafood restaurants. Joe's serves a variety of high-quality seafood items, with an emphasis on crab. Joe's is a high-energy, family-friendly restaurant that encourages guests to "roll up your sleeves and crack into some crab." Brick House Tavern + Tap is a casual restaurant brand that provides guests an elevated experience appropriate for every day usage. Macaroni Grill, a pioneer in the polished casual dining segment, offers guests a blend of authentic Italian food with innovative Italian preparation.

Since our acquisition in 2006, we have implemented several initiatives that we believe have favorably impacted our performance at Joe's. These factors include improving our executive leadership team as well as management in our restaurants, expanding our marketing program from spot network to national cable advertising, innovating Joe's menu to increase our sales of crab related items and improving operational execution and efficiency. As a result of these initiatives, we have experienced 21 out of the last 22 fiscal quarters of positive comparable restaurant sales growth and improved our financial results. We believe the initiatives undertaken at Joe's have also repositioned the brand as a market leading casual seafood restaurant.

While executing these initiatives at Joe's, we also developed and successfully launched a new restaurant brand, Brick House Tavern + Tap. With the addition of the Brick House brand, on July 7, 2009, we officially changed our name to Ignite Restaurant Group, Inc. The first two Brick House locations were opened in 2008 by converting former Joe's locations into Brick House locations. Based on the results of these two locations, we began opening Brick House locations as new restaurants. Brick House has since grown to 20 restaurants operating in 10 states, but remains a relatively small part of our business when compared to our company-wide operations. Our local store marketing initiatives for Brick House have produced comparable restaurant sales increase for the last eight consecutive fiscal quarters. For fiscal year 2013, revenues from our Brick House brand were 6.8% of our total revenues.

Outlook

Our near term business strategy focuses on two primary elements: reviving the Macaroni Grill brand and continuing the growth of our legacy brands through new unit development.

We completed our acquisition of Macaroni Grill on April 9, 2013. Prior to the acquisition, Macaroni Grill's revenues were steadily declining, including a decline of approximately 25% over the last three fiscal years, from $524.4 million in the fiscal year ended June 30, 2010 to $395.4 million in the fiscal year ended June 27, 2012. Since our acquisition, the comparable restaurant sales of Macaroni Grill continued to decline by 6.5%.

We believe that Macaroni Grill has significant earnings potential but has underperformed in the last several years. Similar to Macaroni Grill, the performance of the Joe's brand was lagging before it came under Ignite's management. However, the experience of our management team allowed us to transform Joe's into a market leader, while simultaneously developing and launching Brick House.


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Despite a difficult economic environment, we achieved positive comparable restaurant sales growth in 21 out the last 22 quarters, expanded our geographic footprint and improved our financial performance in the four year period following the acquisition of Joe's.

We believe many of the same key elements of the Joe's transformation are present at Macaroni Grill, including the ability to: accelerate menu innovation to create a relevant, compelling menu; elevate service, atmosphere and operations to create a premium dining experience; revamp the current marketing plan and emphasize innovation and continuity in our messaging; and optimize real estate by converting underperforming restaurants into Joe's or Brick House restaurants. In addition, Macaroni Grill will benefit from the talent and innovation of our culinary and beverage teams that have driven innovation success at Joe's and Brick House.

Additionally, since the acquisition of Macaroni Grill, we have implemented a comprehensive marketing program that includes national cable television advertising, social media communications, and an updated and enhanced menu. In addition, we increased restaurant-level staffing in order to deliver our expected level of guest services and to help increase revenues. We are also in the process of bringing many of the original brand elements that historically made a visit to Macaroni Grill a memorable experience back to our Macaroni Grill restaurants. For example, we have begun to restore wine as the key focus of a Macaroni Grill visit by, among other things, reviving our house wine feature, which we believe was a key element of Macaroni Grill's early success. We have also reintroduced the consistent presence of opera singers to our Macaroni Grill restaurants system-wide to provide entertainment that elevates our guests' dining experience to an authentic Italian experience.

While the Macaroni Grill business has generated a loss from operations of $19.9 million and negative cash flows since the acquisition, we believe these investments, along with continued marketing strategy and menu development evolution, will allow us to improve the operations of the Macaroni Grill brand and make it a positive contributor to our financial results. However, these measures or any other changes we implement may not increase guest traffic or improve the performance at our Macaroni Grill restaurants.

For fiscal year 2013, we opened 14 new restaurants, including five conversions, and closed nine restaurants, including three closed for conversion. We target opening as many as eight new restaurants in fiscal year 2014, including as many as five conversions.

Key Performance Indicators

In assessing the performance of our business, we consider a variety of performance and financial measures. The key measures for determining how our business is performing are comparable restaurant sales growth, average weekly sales, restaurant operating weeks, average check, average unit volume and number of restaurant openings.

Comparable Restaurant Sales Growth

Comparable restaurant sales growth reflects the change in year-over-year sales for the comparable restaurant base. We define the comparable restaurant base to include those restaurants open for at least 104 weeks, or approximately 24 months. As of the fiscal years ended December 30, 2013, December 31, 2012 and January 2, 2012, there were 309 (including 179 Macaroni Grill restaurants), 123 and 114 restaurants, respectively, in our comparable restaurant base. Comparable restaurant sales growth can be generated by an increase in guest counts and/or by increases in the average check amount resulting from a shift in menu mix and/or increase in price. This measure highlights performance of existing restaurants as the impact of new restaurant openings is excluded.


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Average Weekly Sales

Average weekly sales is a key measure of individual restaurant economic performance of new and existing restaurants. Average weekly sales reflects total sales of all restaurants divided by restaurant operating weeks, which is the aggregate number of weeks that restaurants are in operation over a specified period of time. This measure is subject to seasonality for periods less than one year.

Restaurant Operating Weeks

Restaurant operating weeks is the aggregate number of weeks that our restaurants are in operation over a specific period of time.

Average Check

Average check is calculated for Joe's and Macaroni Grill by dividing net sales by guest counts for a given time period. Management uses this indicator to analyze the dollars spent in our Joe's and Macaroni Grill restaurants per guest. This measure aids management in identifying trends in guest preferences, as well as the effectiveness of menu price increases and other menu changes.

Guest counts represent the estimated number of guests served in our restaurants. The count is estimated based on the number of entrées sold. Our estimates may vary from actual guest counts due to the variability in the level of sharing of certain entrée items on our menu. Given the significant level of alcohol sales and appetizer sales at Brick House, guest count is more difficult to quantify and therefore, we do not currently calculate average check as a key performance indicator for that brand.

Average Unit Volume

Average unit volume represents the average sales for restaurants included in the comparable restaurant base for a given time period, typically annually. Average unit volume reflects total sales for restaurants in our comparable restaurant base divided by the number of restaurants in our comparable restaurant base. This measure is subject to seasonality for periods less than one year.

Number of Restaurant Openings

Number of restaurant openings reflects the number of restaurants opened or converted during a particular reporting period. Before we open new restaurants or convert existing restaurants, we incur pre-opening costs, which are defined below. Typically, new restaurants open with an initial start-up period of higher than normalized sales volumes, which subsequently decrease to stabilized levels. While sales volumes are generally higher during the initial opening period, new restaurants typically experience normal inefficiencies in the form of higher cost of sales, labor and other direct operating expenses for several months and as a result, restaurant operating margins are generally lower during the start-up period of operation. The number and timing of restaurant openings has had, and is expected to continue to have, an impact on our results of operations.


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Results of Operations

The following table presents the consolidated statement of operations for the past three fiscal years expressed as a percentage of revenues.

                                                            Fiscal Year
                                                     2013       2012      2011
       Revenues                                       100.0 %    100.0 %   100.0 %
       Costs and expenses
       Restaurant operating costs and expenses
       Cost of sales                                   29.9       31.3      31.5
       Labor expenses                                  30.7       27.4      27.6
       Occupancy expenses                               8.8        7.3       7.6
       Other operating expenses                        20.9       17.5      17.9
       General and administrative                       6.9        6.8       5.8
       Depreciation and amortization                    3.6        4.0       4.0
       Pre-opening costs                                0.6        0.8       1.2
       Asset impairments and closures                   0.2        0.0       0.1
       Loss on disposal of property and equipment       0.3        0.5       0.3


       Total costs and expenses                       102.0       95.6      95.8


       Income (loss) from operations                   (2.0 )      4.4       4.2
       Interest expense, net                           (0.7 )     (2.0 )    (2.3 )
       Gain (loss) on insurance settlements             0.2       (0.2 )     0.3


       Income (loss) before income taxes               (2.5 )      2.3       2.2
       Income tax expense (benefit)                    (1.6 )      0.4      (0.8 )


       Net income (loss)                               (0.9 )%     1.9 %     3.0 %


º *
º The percentages reflected are subject to rounding adjustments.


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The following table sets forth additional operating information for the periods indicated that we use in assessing our performance:

                                                            Fiscal Year
                                                   2013         2012        2011
                                                       (dollars in thousands)
   Selected Other Data(1)(2):
   Number of restaurants open (end of period):
   Joe's Crab Shack                                    136          129         119
   Brick House Tavern + Tap                             20           15          16
   Romano's Macaroni Grill                             179            -           -


   Total restaurants                                   335          144         135
   Restaurant operating weeks
   Joe's Crab Shack                                  6,912        6,543       6,022
   Brick House Tavern + Tap                            842          824         849
   Romano's Macaroni Grill                           6,957            -           -
   Average weekly sales
   Joe's Crab Shack                              $      65    $      64   $      60
   Brick House Tavern + Tap                      $      61    $      56   $      55
   Romano's Macaroni Grill(3)                    $      37            -           -
   Average unit volumes
   Joe's Crab Shack                              $   3,185    $   3,037   $   2,960
   Brick House Tavern + Tap                      $   3,149    $   3,168   $   3,179
   Romano's Macaroni Grill(4)                    $   1,999            -           -
   Change in comparable restaurant sales
   Joe's Crab Shack                                    1.0 %        2.1 %       7.4 %
   Brick House Tavern + Tap                            5.3 %        3.6 %      (6.9 )%
   Romano's Macaroni Grill                            (6.5 )%         -           -
   Income (loss) from operations
   Joe's Crab Shack                              $  45,635    $  45,272   $  36,260
   Brick House Tavern + Tap                      $   1,197    $   1,391   $    (527 )
   Romano's Macaroni Grill                       $ (19,901 )          -           -
   Corporate                                     $ (41,824 )  $ (26,033 ) $ (18,872 )


   Total                                         $ (14,893 )  $  20,630   $  16,861
   Adjusted net income (loss)(5)                 $  (1,317 )  $  14,675   $   8,592


--------------------------------------------------------------------------------
   º (1)


º Activity for Macaroni Grill commenced from acquisition date, April 9, 2013.

º (2)
º See the definitions of key performance indicators beginning on page 39.

º (3)
º Average weekly sales for Macaroni Grill is calculated based on post-acquisition revenue and operating weeks.

º (4)
º Average unit volume for Macaroni Grill includes both pre- and post-acquisition revenue from January 1, 2013, the beginning of Ignite's fiscal year, until December 30, 2013.

º (5)
º A reconciliation and discussion of these non-GAAP financial measures are included under "Non-GAAP Financial Measures." These measures should be considered in addition to, rather than as a substitute for, U.S. GAAP measures.


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Fiscal Year 2013 (52 Weeks) Compared to Fiscal Year 2012 (52 Weeks)

    The following table sets forth information comparing the components of net
income for the fiscal year ended December 30, 2013 and December 31, 2012.


                                         Fiscal Year          Increase
                                      2013        2012       (Decrease)    Percent Change
                                                   (dollars in thousands)
Revenues                            $ 760,848   $ 465,056    $   295,792             63.6 %
Costs and expenses
Restaurant operating costs and
expenses
Cost of sales                         227,571     145,451         82,120             56.5
Labor expenses                        233,321     127,331        105,990             83.2
Occupancy expenses                     66,737      33,865         32,872             97.1
Other operating expenses              159,344      81,200         78,144             96.2
General and administrative             52,465      31,725         20,740             65.4
Depreciation and amortization          27,507      18,572          8,935             48.1
Pre-opening costs                       4,824       3,871            953             24.6
Asset impairments and closures          1,371         115          1,256          1,092.2
Loss on disposal of property and
equipment                               2,601       2,296            305             13.3


Total costs and expenses              775,741     444,426        331,315             74.5 %


Income (loss) from operations         (14,893 )    20,630        (35,523 )         (172.2 )
Interest expense, net                  (5,246 )    (9,366 )        4,120            (44.0 )
Gain (loss) on insurance
settlements                             1,161        (799 )        1,960           (245.3 )


Income (loss) before income taxes     (18,978 )    10,465        (29,443 )         (281.3 )%
Income tax expense (benefit)          (12,393 )     1,751        (14,144 )         (807.8 )


Net income (loss)                   $  (6,585 ) $   8,714    $   (15,299 )         (175.6 )%

Revenues

Revenues were $760.8 million for fiscal year 2013, an increase of $295.8 million, or 63.6%, compared to revenues of $465.1 million for fiscal year 2012, of which $261.7 million, or 56.3%, of the increase in revenues came from Macaroni Grill, which has been included in our results since April 9, 2013. Comparable restaurant sales of our legacy brands contributed $5.7 million, or 1.2%, of the total revenue increase, while non-comparable restaurants contributed $28.4 million, or 6.1%, of the total revenue increase.

Revenues at Joe's increased 6.9% to $447.8 million in fiscal year 2013 compared to $418.9 million in fiscal year 2012. The increase is related to net new stores in addition to a 1.0% increase in comparable restaurant sales. The comparable restaurant sales increase is comprised of 1.0% increase in pricing and 0.8% increase in mix, offset by a 0.8% decrease in guest count. Joe's average weekly sales increased to $65 thousand from $64 thousand in the prior year. Restaurant operating weeks increased to 6,912 in 2013 from 6,543 in 2012 due to nine new store openings offset by two closed restaurants.

Brick House revenues increased 11.3% to $51.4 million in fiscal year 2013 versus $46.2 million in fiscal year 2012. The increase was the result of a 5.3% increase in comparable restaurant sales and five new store openings. The comparable restaurant sales increase is comprised of a 2.8% increase in pricing and 2.5% increase in combined guest count and mix benefits. Brick House average weekly sales increased to $61 thousand from $56 thousand in the prior year. Restaurant operating weeks increased to 842 in 2013 from 824 in 2012 due to new store openings, partially offset by the closure of one Brick House.


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Revenues at Macaroni Grill were $261.7 million, which includes $2.3 million in royalty income. The 6.5% comparable restaurant sales decrease is comprised of 8.8% decrease in guest count and 0.9% decrease in pricing, offset partially by 3.2% increase in mix.

Operating Costs and Expenses

Restaurant operating costs and expenses increased by $299.1 million, or 77.1%, over the prior year primarily due to the acquisition of Macaroni Grill and the increased operating weeks from new store openings.

As a percent of revenue, cost of sales decreased to 29.9% from 31.3% primarily due to the inclusion of the Macaroni Grill business which tends to have slightly lower food costs as a percent of revenue than Joe's. In addition, we experienced favorable seafood pricing and a continued mix move to more favorable margin items offset partially by discounts and promotions at Macaroni Grill. Labor expenses, as a percentage of revenue, increased to 30.7% from 27.4% due to higher labor costs as a percent of revenue at Macaroni Grill as a result of their lower sales volume. Occupancy expenses, as a percentage of revenue, increased to 8.8% from 7.3% primarily due to deleverage from the lower sales volumes at Macaroni Grill. Other operating expenses increased, as a percentage of revenue, to 20.9% from 17.5% primarily due to deleveraging of fixed costs against lower Macaroni Grill unit sales volume.

General and Administrative

General and administrative expenses increased by $20.7 million, or 65.4%, to $52.5 million for fiscal year 2013 from $31.7 million for fiscal year 2012. The increase was mainly due to a general increase in support center expenses and field supervision associated with the Macaroni Grill acquisition. In addition, we incurred $6.0 million in acquisition-related expenses, $1.3 million in higher stock-based compensation, and $0.8 million in proposed secondary offering expenses, as compared to restatement expenses of $1.9 million and IPO-related expenses of $1.9 million in the prior year. As a percent of revenue, general and administrative expenses remained relatively flat at 6.9% in fiscal year 2013 versus 6.8% in fiscal year 2012.

Depreciation and Amortization

Depreciation and amortization expense increased by $8.9 million, or 48.1%, to $27.5 million for fiscal year 2013 from $18.6 million for fiscal year 2012 primarily due to a higher depreciable base from the addition of the Macaroni Grill restaurants and newly opened restaurants. As a percentage of revenue, depreciation and amortization decreased to 3.6% in the current year from 4.0% in the prior year.

Pre-Opening Costs

Pre-opening costs increased by $1.0 million, or 24.6%, to $4.8 million for fiscal year 2013 from $3.9 million for fiscal year 2012 mainly due to the timing of scheduled restaurant openings partially offset by a decrease in average spending per restaurant opening. We opened 14 new restaurants in 2013 and 11 new restaurants in 2012. We also incurred pre-opening costs in both years for restaurants opened in the subsequent fiscal year.

Asset Impairments and Closures

Asset impairments and closures increased by $1.3 million to $1.4 million for fiscal year 2013 from $0.1 million for fiscal year 2012 mainly due to the current year impairment charge of $0.7 million and the impact of nine restaurants closed in fiscal year 2013 versus two restaurants closed in fiscal year 2012. If we are unable to improve the performance of Macaroni Grill, as discussed in the Outlook section above, we may incur additional impairment charges in the future.


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Loss on Disposal of Property and Equipment

Loss on disposal of property and equipment increased by $0.3 million to $2.6 million for fiscal year 2013 from $2.3 million for fiscal year 2012. The loss in fiscal year 2013 was primarily due to $1.0 million in asset retirement losses for closed, converted and remodeled restaurants, and $1.6 million in replacement of restaurant equipment and facilities improvements. The loss in fiscal year 2012 was primarily due to a $1.0 million write-off of property and equipment for one Joe's restaurant location that was closed in a prior year, $0.6 million in asset retirement losses for converted and remodeled restaurants, and $0.7 million in replacement of restaurant equipment and facilities improvements.

Interest Expense, Net

Interest expense, net decreased by $4.1 million, or 44.0%, primarily due to the write-off of debt issuance costs related to refinancing and debt repayment transactions in fiscal years 2013 and 2012, amounting to approximately $0.5 million and $3.3 million, respectively, and the lower average debt balances in fiscal year 2013 compared to fiscal year 2012.

Gain (Loss) on Insurance Settlements

The gain on insurance settlements during fiscal year 2013 represents insurance recovery on losses recognized in 2012 caused by Hurricane Sandy. The loss on insurance settlements during fiscal year 2012 was caused by property damage write-off, business interruption losses and clean-up costs from Hurricane Sandy amounting to $1.0 million, partially offset by a $0.2 million final insurance recovery settlement related to hurricane damage sustained at one of our restaurants in fiscal year 2008.

Income Tax Expense (Benefit)

Income tax expense decreased by $14.1 million in fiscal year 2013 to a . . .

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