LEASES

12 Months Ended

Dec. 28, 2022

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 28, 2022, the Company had no 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 one facility and ten 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 28, 2022, 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 $13.0 million of ROU assets and lease liabilities for the year ended December 28, 2022 were recognized, and will be amortized over the new lease term.

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.

The reassessments had an impact on the original lease classification of one property during the year ended December 28, 2022 which represented $0.7 million of the $13.0 million total additional ROU asset and lease liabilities for fiscal 2022. There were no reassessments that impacted the original lease classification during the year ended December 29, 2021. 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 2022, the Company determined that the carrying value of an ROU assets at one restaurant was not recoverable. As a result, the Company recorded a less than $0.1 million non-cash impairment charge for the year ended December 28, 2022 related to one restaurant closed in California. 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.

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 28, 2022						December 29, 2021						December 30, 2020
	Property		Equipment				Property		Equipment				Property		Equipment
	Leases		Leases		Total		Leases		Leases		Total		Leases		Leases		Total
Finance lease cost:
Amortization of right-of-use assets	$	73	$	2	$	75	$	78	$	2	$	80	$	11	$	—	$	11
Interest on lease liabilities		42		3		45		58		1		59		27		—		27
Operating lease cost		26,537		1,005		27,542		26,501		1,122		27,623		26,578		1,227		27,805
Short-term lease cost		—		18		18		—		21		21		—		23		23
Variable lease cost		597		677		1,274		539		354		893		444		191		635
Sublease income		(4,555)		—		(4,555)		(3,823)		—		(3,823)		(3,251)		—		(3,251)
Total lease cost	$	22,694	$	1,705	$	24,399	$	23,353	$	1,500	$	24,853	$	23,809	$	1,441	$	25,250

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

	December 28, 2022		December 29, 2021		December 30, 2020
Lease cost – Occupancy and other operating expenses	$	23,730	$	24,020	$	23,972
Lease cost – General & administrative		465		413		464
Lease cost – Depreciation and amortization		73		78		11
Lease cost – Interest expense		45		59		27
Lease cost – Closed-store reserve		86		283		776
Total lease cost	$	24,399	$	24,853	$	25,250

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

	December 28, 2022								December 29, 2021								December 30, 2020
	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	$	27,221		$	953		$	28,174	$	26,414		$	1,084		$	27,498	$	23,683		$	1,230		$	24,913
Financing cash flows used for finance leases	$	106		$	56		$	162	$	102		$	46		$	148	$	34		$	5		$	39
Non-cash investing and financing activities:
Operating lease ROU assets obtained in exchange for lease liabilities:
Operating lease ROU assets	$	12,978		$	92		$	13,070	$	17,763		$	—		$	17,763	$	5,850		$	13		$	5,863
Finance lease ROU assets obtained in exchange for lease liabilities:
Finance lease ROU assets	$	—		$	28		$	28	$	—		$	196		$	196	$	1,623		$	54		$	1,677
Derecognition of ROU assets due to terminations, impairment or modifications	$	(39)		$	(35)		$	(74)	$	(4,513)		$	(99)		$	(4,612)	$	(543)		$	(26)		$	(569)
Other Information
Weighted-average remaining years in lease term—finance leases		17.87			3.19					18.42			4.02					18.98			4.52
Weighted-average remaining years in lease term—operating leases		10.73			1.73					11.27			1.44					11.45			2.31
Weighted-average discount rate—finance leases		2.57	%		1.53	%				2.78	%		1.54	%				2.50	%		1.68	%
Weighted-average discount rate—operating leases		4.54	%		3.80	%				4.45	%		3.89	%				4.29	%		3.93	%

Information regarding the Company’s minimum future lease obligations at December 28, 2022 is as follows (in thousands):

	Finance		Operating Leases
	Minimum		Minimum		Minimum
	Lease		Lease		Sublease
For the Years Ending	Payments		Payments		Income
December 27, 2023	$	151	$	27,876	$	4,040
December 25, 2024		151		25,887		3,685
December 31, 2025		147		23,729		3,207
December 30, 2026		114		21,595		2,881
December 29, 2027		104		19,806		2,829
Thereafter		1,479		117,566		20,403
Total	$	2,146	$	236,459	$	37,045
Less: imputed interest (1.53% - 4.54%)		(410)		(51,315)
Present value of lease obligations		1,736		185,144
Less: current maturities		(110)		(19,995)
Noncurrent portion	$	1,626	$	165,149

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.

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 28, 2022, December 29, 2021, and December 30, 2020, the Company received $0.4 million, $0.4 million and $0.6 million, respectively, of lease income from company-owned locations.