Leases

12 Months Ended

Dec. 29, 2021

Leases [Abstract]

Leases

5. LEASES

Nature of leases

The Company’s operations utilize property, facilities, equipment and vehicles leased from others. Additionally, the Company has various contracts with vendors that have been determined to contain an embedded lease in accordance with Topic 842.

As of December 29, 2021, the Company had two leases that it had entered into, but had not yet commenced. The Company does not have control of the property until lease commencement.

Building and facility leases

The majority of the Company’s building and facilities leases are classified as operating leases; however, the Company currently has two facility and nine equipment leases that are classified as finance leases.

Restaurants are operated under lease arrangements that generally provide for a fixed base rent and, in some instances, contingent rent based on a percentage of gross operating profit or net revenues in excess of a defined amount. Additionally, a number of the Company’s leases have payments, which increase at pre-determined dates based on the change in the consumer price index. For all leases, the Company also reimburses the landlord for non-lease components, or items that are not considered components of a contract, such as common area maintenance, property tax and insurance costs. While the Company determined not to separate lease and non-lease components, these payments are based on actual costs, making them variable consideration and excluding them from the calculations of the ROU asset and lease liability.

The initial terms of land and restaurant building leases are generally 20 years, exclusive of options to renew. These leases typically have four 5-year renewal options, which have generally been excluded in the calculation of the ROU asset and lease liability, as they are not considered reasonably certain to be exercised, unless (1) the renewal had already occurred as of the time of adoption of Topic 842, or (2) there have been significant leasehold improvements that have a useful life that extend past the original lease term. Furthermore, there are no residual value guarantees and no restrictions imposed by the lease.

During the year ended December 29, 2021, the Company reassessed the lease terms on 22 restaurants due to certain triggering events, such as the addition of significant leasehold improvements, the decision to terminate a lease, or the

decision to renew. As a result of the reassessment, an additional $17.8 million of ROU assets and lease liabilities for the year ended December 29, 2021 were recognized, and will be amortized over the new lease term.

During the year ended December 30, 2020, the Company reassessed the lease terms on 12 restaurants due to certain triggering events, such as the addition of significant leasehold improvements, the decision to terminate a lease, or the decision to renew. As a result of the reassessment, an additional $3.9 million of ROU assets and lease liabilities for the year ended December 30, 2020 were recognized, and will be amortized over the new lease term.

The reassessments did not have any impact on the original lease classification. Additionally, as the Company adopted all practical expedients available under Topic 842, no reallocation between lease and non-lease components was necessary.

The Company also subleases facilities to certain franchisees and other non-related parties which are also considered operating leases. Sublease income also includes contingent rental income based on net revenues. The vast majority of these leases have rights to extend terms via fixed rental increases. However, none of these leases have early termination rights, the right to purchase the premises or any residual value guarantees. The Company does not have any related party leases.

During fiscal 2021, the Company determined that the carrying value of ROU assets at two restaurants were not recoverable. As a result, the Company recorded a $0.4 million non-cash impairment charge for the year ended December 29, 2021 related to one restaurant closed in Texas in 2019 and one restaurant closed in California. During fiscal 2020, the Company determined that the carrying value of ROU assets at one restaurant was not recoverable. As a result, the Company recorded a $0.5 million non-cash impairment charge for the year ended December 30, 2020 related to one restaurant in Texas, which was sold to a franchisee in the prior year. During fiscal 2019, the Company determined that the carrying value of ROU assets at certain restaurants was not recoverable. As a result, we recorded a $3.2 million impairment expense for the year ended December 25, 2019. The impairment primarily related to four restaurants sold to franchisees and one restaurant closed during fiscal 2019.

Equipment

Leases of equipment primarily consist of restaurant equipment, copiers and vehicles. These leases are fixed payments with no variable component. Additionally, no optional renewal periods have been included in the calculation of the ROU Asset, there are no residual value guarantees and no restrictions imposed.

Significant Assumptions and Judgments

In applying the requirements of Topic 842, the Company made significant assumptions and judgments related to determination of whether a contract contains a lease and the discount rate used for the lease.

In determining if any of the Company’s contracts contain a lease the Company made assumptions and judgments related to its ability to direct the use of any assets stated in the contract and the likelihood of renewing any short-term contracts for a period extending past twelve months.

The Company also made significant assumptions and judgments in determining an appropriate discount rate for property leases. These included using a consistent discount rate for a portfolio of leases entered into at varying dates, using the full 20-year term of the lease, excluding any options, and using the total minimum lease payments. For all other leases, the Company uses the discount rate implicit in the lease, or the Company’s incremental borrowing rate.

As the Company has adopted the practical expedient not to separate lease and non-lease components, no significant assumptions or judgments were necessary in allocating consideration between these components, for all classes of underlying assets.

The following table presents the Company’s total lease cost, disaggregated by underlying asset (in thousands):

	December 29, 2021						December 30, 2020						December 25, 2019
	Property		Equipment				Property		Equipment				Property		Equipment
	Leases		Leases		Total		Leases		Leases		Total		Leases		Leases		Total
Finance lease cost:
Amortization of right-of-use assets	$	78	$	2	$	80	$	11	$	—	$	11	$	9	$	—	$	9
Interest on lease liabilities		58		1		59		27		—		27		27		—		27
Operating lease cost		26,501		1,122		27,623		26,578		1,227		27,805		26,212		1,273		27,485
Short-term lease cost		—		21		21		—		23		23		—		34		34
Variable lease cost		539		354		893		444		191		635		455		186		641
Sublease income		(3,823)		—		(3,823)		(3,251)		—		(3,251)		(2,430)		—		(2,430)
Total lease cost	$	23,353	$	1,500	$	24,853	$	23,809	$	1,441	$	25,250	$	24,273	$	1,493	$	25,766

The following table presents the Company’s total lease cost on the consolidated statement of income (in thousands):

	December 29, 2021		December 30, 2020		December 25, 2019
Lease cost – Occupancy and other operating expenses	$	24,020	$	23,972	$	24,540
Lease cost – General & administrative		414		464		463
Lease cost – Depreciation and amortization		78		11		9
Lease cost – Interest expense		58		27		27
Lease cost - Closed-store reserve		283		776		727
Total lease cost	$	24,853	$	25,250	$	25,766

The Company had the following cash and non-cash activities associated with its leases (in thousands):

	December 29, 2021								December 30, 2020								December 25, 2019
	Property			Equipment					Property			Equipment					Property			Equipment
	Leases			Leases			Total		Leases			Leases			Total		Leases			Leases			Total
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for operating leases	$	26,414		$	1,084		$	27,498	$	23,683		$	1,230		$	24,913	$	25,168		$	1,282		$	26,450
Financing cash flows used for finance leases	$	102		$	46		$	148	$	34		$	5		$	39	$	68		$	—		$	68
Non-cash investing and financing activities:
Operating lease ROU assets obtained in exchange for lease liabilities:
Operating lease ROU assets	$	17,763		$	—		$	17,763	$	5,850		$	13		$	5,863	$	10,339		$	256		$	10,595
Finance lease ROU assets obtained in exchange for lease liabilities:
Finance lease ROU assets	$	—		$	196		$	196	$	1,623		$	54		$	1,677	$	—		$	—		$	—
Derecognition of ROU assets due to terminations, impairment or modifications	$	(4,513)		$	(99)		$	(4,612)	$	(543)		$	(26)		$	(569)	$	(4,574)		$	(157)		$	(4,731)
Other Information
Weighted-average remaining lease term—finance leases		18.42			4.02					18.98			4.52					2.83			—
Weighted-average remaining lease term—operating leases		11.27			1.44					11.45			2.31					12.08			3.20
Weighted-average discount rate—finance leases		2.78	%		1.54	%				2.50	%		1.68	%				11.10	%		—	%
Weighted-average discount rate—operating leases		4.45	%		3.89	%				4.29	%		3.93	%				4.38	%		3.96	%

Information regarding the Company’s minimum future lease obligations at December 29, 2021 is as follows (in thousands):

	Finance		Operating Leases
	Minimum		Minimum		Minimum
	Lease		Lease		Sublease
For the Years Ending	Payments		Payments		Income
December 28, 2022	$	190	$	27,866	$	3,588
December 27, 2023		145		26,115		3,571
December 25, 2024		145		24,013		3,456
December 31, 2025		141		21,773		3,106
December 30, 2026		108		19,546		2,789
Thereafter		1,582		127,306		23,165
Total	$	2,311	$	246,619	$	39,675
Less: imputed interest (1.54% - 4.45%)		(456)		(55,009)
Present value of lease obligations		1,855		191,610
Less: current maturities		(143)		(19,959)
Noncurrent portion	$	1,712	$	171,651

Short-Term Leases

The Company has multiple short-term leases, which have terms of less than 12 months, and thus were excluded from the recognition requirements of Topic 842. The Company has recognized these lease payments in its consolidated statement of income on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.

In April 2020, the FASB issued guidance allowing entities to make a policy election whether to account for lease concessions related to the COVID-19 pandemic as lease modifications. The election applies to any lessor-provided lease concession related to the impact of the COVID-19 pandemic, provided the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee. During the fiscal year ended December 30, 2020, the Company received non-substantial concessions from certain landlords in the form of rent deferrals and abatements. The Company elected to not account for these rent concessions as lease modifications. The rent concessions were recorded as part of other accrued expenses. The recognition of rent concessions did not have a material impact on our consolidated financial statements as of December 30, 2020. For the year ended December 29, 2021, there were no rent concessions.

Lessor

The Company is a lessor for certain property, facilities and equipment owned by the Company and leased to others, principally franchisees, under non-cancelable leases with initial terms ranging from 3 to 20 years. These lease agreements generally provide for a fixed base rent and, in some instances, contingent rent based on a percentage of gross operating profit or net revenues. All leases are considered operating leases.

For the leases in which the Company is the lessor, there are options to extend the lease. However, there are no terms and conditions to terminate the lease, no right to purchase premises and no residual value guarantees. Additionally, there are no related party leases.

For the years ended December 29, 2021, December 30, 2020, and December 25, 2019, the Company received $0.4 million, $0.6 million and $0.5 million, respectively, of lease income from company-owned locations.