Meritage Reports First Quarter 2005 Sales Increase of 7.8%; 26th
Consecutive Quarter of Sales Growth
GRAND RAPIDS, Mich., March 29 /PRNewswire-FirstCall/ -- Meritage Hospitality
Group Inc. (AMEX:MHG), the nation's only publicly traded Wendy's franchisee and
the nation's first O'Charley's franchisee, today announced net sales for the
first fiscal quarter ended February 27, 2005, increased 7.8% to $13.0 million,
compared to $12.1 million during the same period last year. Meritage reported a
net loss for the quarter of $1,804,000 or $0.38 per share, compared to a net
loss of $480,000 or $0.11 per share for the same period last year.
Meritage's Chief Executive Officer, Robert E. Schermer, Jr., stated, "We are
very pleased with our continued sales increases which represents the 26th
consecutive quarter of sales increases for Meritage. This underscores
Meritage's long-term commitment to new restaurant growth. As expected,
however, we experienced a decline in earnings due to a number of factors
including our strategy of rapid expansion in the O'Charley's restaurant brand. Pre-opening costs combined with the operational inefficiencies of immature
stores resulted in a net loss of $398,000 in the O'Charley's business segment. Also, as detailed below, our Wendy's operations continues to experience margin
pressure as commodity prices remain high and menu pricing remains relatively
unchanged. We also had no gain from the sale of surplus non-operating property
in the first quarter compared to a gain of $137,000 for the same period last
year. Finally, our strategy of funding a portion of the O'Charley's expansion
with sale-leaseback transactions has mixed effects. On the positive side, the
sale-leaseback transactions generated cash proceeds of $9.9 million in the
first quarter, permitted the Company to pay down $5.9 million of long-term
debt, and resulted in deferred long-term gains of $3.9 million. These
transactions also result in the immediate recognition of pre- payment expenses
as well as much higher state tax expense. Therefore, I believe our current
results paint an incomplete picture of the Company's progress in establishing
the basis for continued revenue growth and earnings improvements in the
future." WENDY'S RESTAURANT OPERATIONS Food costs remain the number one concern for the entire Wendy's franchise
system. Where it maintains control, Meritage has been successful in
controlling costs (e.g., food, labor, energy, repairs, insurance, etc.). However, Meritage has little control over certain areas of its food costs as
many products (in particular beef) are purchased under contracts negotiated by
Wendy's International. Jack Schuessler, the CEO of Wendy's International,
commented on the high beef costs at the Reuters Food Summit in Chicago earlier
this month. According to Schuessler, beef costs have pushed to historical
highs for the past two years, but will likely soften in 2006 and 2007 due to
imports from Australia and Canada, and U.S. producers enlarging their herds. Schuessler noted that two years ago, Wendy's was paying 99ยข per pound for
ground beef and is now paying $1.41 per pound.
Meritage believes that Wendy's advertised menu pricing has not kept up with
these rising costs. Wendy's International has indicated that they may address
menu-pricing changes in the second half of 2005, along with the introduction of
new products such as the Frescata deli-style sandwiches. But Schuessler said
he does not see any significant change to menu pricing. Mr. Schermer stated
that Wendy's International needs to be proactive in addressing menu pricing.
"Meritage will continue to operate our Wendy's restaurants at or near the
optimal level of controllable costs. Our pricing strategy is to maintain the
value proposition, and only increase prices as a last resort to protect
margins," Mr. Schermer stated.
O'CHARLEY'S RESTAURANT OPERATIONS One way to better withstand the specific cost issues experienced in our Wendy's
operations is through segment diversification. Fortunately, management
previously engaged this strategy with the rollout of the O'Charley's casual
dining brand. Through its O'Charley's restaurants, Meritage is developing a
more diversified menu that is creating a hedge against isolated increases in
commodity costs. The Company opened its second O'Charley's restaurant in
February, and will be opening its third store in May. We will continue to
invest in the infrastructure that will permit us to accelerate expansion of the
O'Charley's brand.
Meritage is one of the nation's premier franchise operators. The Company is
the only publicly held Wendy's franchisee, operating 48 "Wendy's Old Fashioned
Hamburgers" restaurants throughout Western and Southern Michigan and serving
more than nine million customers annually. Meritage has been one of the
fastest growing Wendy's franchisees within the Wendy's franchise system over
the past five years. Meritage is also the nation's first and only publicly
held O'Charley's franchisee. Meritage holds the exclusive right to develop
O'Charley's restaurants in the State of Michigan.
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION ACT OF 1995 Certain statements contained in this news release that are not historical facts
constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Forward-looking statements may be identified
by words such as "estimates," "anticipates," "projects," "plans," "expects,"
"believes," "should," and similar expressions, and by the context in which they
are used. Such statements are based only upon current expectations of the
Company. Any forward-looking statement speaks only as of the date made.
Reliance should not be placed on forward-looking statements because they
involve known and unknown risks, uncertainties and other factors which may
cause actual results, performance or achievements to differ materially from
those expressed or implied. Meritage undertakes no obligation to update any
forward-looking statements to reflect events or circumstances after the date on
which they are made.
Statements concerning expected financial performance, business strategies and
action which Meritage intends to pursue to achieve its strategic objectives,
constitute forward-looking information. Implementation of these strategies and
achievement of such financial performance are subject to numerous conditions,
uncertainties and risk factors, which could cause actual performance to differ
materially from the forward-looking statements. These include, without
limitation: competition; changes in the national or local economy; changes in
consumer tastes and eating habits; concerns about the nutritional quality of
our restaurant menu items; concerns about consumption of beef or other menu
items due to diseases including E. coli, hepatitis, and mad cow; promotions and
price discounting by competitors; severe weather; changes in travel patterns;
road construction; demographic trends; the cost of food, labor and energy; the
availability and cost of suitable restaurant sites; delays in scheduled
restaurant openings; the ability to finance expansion; interest rates;
insurance costs; the availability of adequate managers and hourly-paid
employees; directives issued by the franchisor regarding operations and menu
pricing; the general reputation of Meritage's and its franchisors' restaurants;
legal claims; and the recurring need for renovation and capital improvements.
In addition, Meritage's expansion into the casual dining restaurant segment as
a franchisee of O'Charley's will subject Meritage to additional risks
including, without limitation, unanticipated expenses or difficulties in
securing market acceptance of the O'Charley's restaurant brand, the ability of
our management and infrastructure to successfully implement the O'Charley's
development plan in Michigan, and our limited experience in the casual dining
segment. Also, Meritage is subject to extensive government regulations
relating to, among other things, zoning, public health, sanitation, alcoholic
beverage control, environment, food preparation, minimum and overtime wages and
tips, employment of minors, citizenship requirements, working conditions, and
the operation of its restaurants. Because Meritage's operations are
concentrated in certain areas of Michigan, a marked decline in Michigan's
economy, or in the local economies where our restaurants are located, could
adversely affect our operations.
Meritage Hospitality Group Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended February 27, 2005 and February 29, 2004
(Unaudited)
2005 2004 Food and beverage revenue $12,997,166 $12,059,124 Costs and expenses
Cost of food and beverages 3,709,579 3,281,462
Operating expenses 8,438,470 7,276,724
General and administrative expenses 1,052,364 818,583
Depreciation and amortization 665,613 701,441
Total costs and expenses 13,866,026 12,078,210 Loss from operations (868,860) (19,086) Other income (expense)
Interest expense (552,238) (603,189)
Debt extinguishment charges (418,473) -
Interest income 33,437 1,464
Other income, net 2,500 4,400
Gain on sale of non-operating property - 136,800
Total other expense (934,774) (460,525) Loss before income taxes (1,803,634) (479,611) Income tax benefit - - Net loss (1,803,634) (479,611) Preferred stock dividends declared 213,284 113,284 Net loss on common shares $(2,016,918) $(592,895) Net loss per common share -
basic and diluted $(0.38) $(0.11) Weighted average shares outstanding -
basic and diluted 5,244,567 5,343,286
DATASOURCE: Meritage Hospitality Group Inc.
CONTACT: Robert E. Schermer, Jr. of Meritage Hospitality Group Inc., +1-616-776-2600 Web site: http://www.meritagehospitality.com/
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