Restaurant Finance Monitor
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Fifteen years of very low interest rates has encouraged speculative activities, in the restaurant industry and elsewhere. Since capital is available at bargain rates it is natural for management of capital-intensive businesses to take increasing liberties in presenting their respective stories. This is the first of a number of articles that discuss accounting “variations”, in the hope of encouraging further scrutiny by all stakeholders.

ADJUSTED EBITDA is very widely used in public reporting, accepted as a matter of course as a gauge of company performance. Use it if you like, but it should be obvious that Depreciation is a real cost over time because facilities have to be maintained and refreshed and that is why the IRS allows the deduction as an expense. Among other items that are routinely added back to net income to get to Adjusted EBITDA are non-cash stock issuance to executives (even though this is a real dilution of public stockholder equity), legal expenses (which somehow keep recurring), impairment charges (clearing out the remnants of past mistakes), and others.

The good news is that most often the investment community provides generous valuations to the companies that keep it simple, not usually dwelling on Adjusted EBTIDA. Texas Roadhouse, Darden, McDonald’s and Yum Brands are a few that come to mind. Unfortunately, too often, especially in easy money times, the investment community shrugs off some questionable accounting treatment.

The following are a couple of recent “wrinkles” that caught our eye, and have been a catalyst for this subject. One is a creative approach to calculating the fully diluted shares outstanding. The second is that some unit level models seem to be carrying more than normal Depreciation. The creativity in calculating diluted share ownership is obviously misleading and overstated Depreciation increases EBITDA (at both the unit and corporate level), while understating GAAP earnings. If management is emphasizing Adjusted EBITDA rather than GAAP EPS, higher Depreciation serves management’s purpose.

The misleading shares outstanding arises when companies come public with A common shares, as well as convertible B and/or C shares, sometimes also with a convertible Preferred D share category. Without naming names, these companies present current average shares outstanding largely based on the A shares, with the B, C or D shares convertible under “certain cirumstances”. Though the conversion possibility is at the option of the shareholder, the corporate rationale for not showing the dilution is because the B,C or D owners “have no current economic interest”. That may be true today because there is no purpose in conversion, but if there is dividend or takeover, you can bet that the B,C and D shares will choose to take advantage of their potential economic interest.

The Depreciation issue is more common and can be a result of a number of accounting “treatments”. In each case, however, higher than normal D&A must be a result of capitalization (rather than expensing) certain cash outlays and/or higher than normal capex to open facilities. The following table shows the D&A as a percentage of Restaurant Sales for the major company operated chains. You can see that most of the time D&A runs between three and five percent of sales, but there are a number of instances where it is materially higher. Dutch Bros, for instances, capitalizes some long long term store leases, which we calculate seems to increase their D&A by a couple of points (200 basis points). Personally, we wonder why D&A at BROS should be so much higher than at Chipotle (CMG). G&A at Dave & Buster’s is also high, and we suspect that their rate of Depreciation is higher than average due to the nature of their “experiential” capital improvements.


Our objective here is not to explain every variation in accounting treatment that is out there. However, as we pursue our investment process, we do our best to distinguish between “the story” and “the facts”. We encourage our readers to do the same and welcome any feedback our readers can provide on this subject.

Roger Lipton