Calcbench kicked off our version of Restaurant Week yesterday, with a post examining same-store sales in the retail food sector and how those revenues have been hurt by coronavirus.
Today comes our second course: asset impairments that restaurant firms are disclosing. We don’t yet have many examples, but the examples we do have convey lots of interesting details. Analysts should take note, so you can ask sharper questions as more firms disclose asset impairments in the quarters to come.
Take Del Taco Restaurants ($TACO) as one example. The company filed its Q1 2020 report on May 4, and disclosed a total of $107.4 million in asset impairments — roughly 12.4 percent of the $862 million in assets Del Taco had at the end of Q4 2019. As shown in Figure 1, below, the impairments happened across a range of asset categories.
The biggest impairment happened in goodwill. How, exactly, did Del Taco reach that number? We used our Interactive Disclosure page to see what the company had to say, and found this:
The consequences of the outbreak of the COVID-19 pandemic coupled with a sustained decline in the Company's stock price were determined to be indicators of impairment. As such, using Level 3 inputs, the Company performed a quantitative goodwill impairment assessment using both the discounted cash flow method and guideline public company method to determine the fair value of its reporting unit. Significant assumptions and estimates used in determining fair value include future revenues, operating costs, working capital changes, capital expenditures, a discount rate that approximates the Company's weighted average cost of capital and a selection of comparable companies.
This is interesting because Del Taco is making a lot of subjective judgments to arrive at its impairment number. First, “Level 3 inputs” are asset values that a company derives from its own models and judgments about what seems right. They are not data-driven values you might derive from, say, prices paid for assets on an open market.
Second, the company lists many significant assumptions and estimates about important items, such as revenue, cost, and discount rates. There’s nothing wrong with that per se, but remember that Covid-19 is challenging many assumptions about how business is supposed to work.
Del Taco also impaired $8.3 million in long-lived assets. What’s that about? Again, we found the details in the disclosures:
This is all interesting too, because it touches on our post from yesterday about restaurant closures. The more restaurants a firm closes, the larger these long-lived asset impairments are likely to be.
Another Serving of Impairment
OK, enough with Del Taco. If steak is more to your liking, consider this very different impairment disclosure from Bloomin’ Brands ($BLMN). Bloomin grouped all of its $65 million in charges related to Covid-19 into one section, and then listed them all in table format. See Figure 2, below.
Again we see impairments for operating leases, goodwill, and fixed assets; plus other interesting charges like $6.2 million in spoiled food and $16.2 million in wages paid to idled employees.
Not all of those are impairments in the strict sense of the term, but Bloomin is serving investors by giving a clear, precise answer to an important question: How is Covid-19 disrupting the business?
Then if you still want the details on specific impairments, you can further investigate. The “goodwill & other impairment” charge, for example, mostly came from a $2 million goodwill cut to Bloomin’s Hong Kong operations.
That’s our second course for Restaurant Week. Coming next: risk factors and forward-looking statements.