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LEASES

6 Months Ended

Jun. 28, 2023

11. 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 June 28, 2023, the Company had one lease 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 10 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 that 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 CAM, 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 thirteen and twenty-six weeks ended June 28, 2023, the Company reassessed the lease terms on 10 and 22 restaurants, respectively, due to certain triggering events, such as the addition of significant leasehold improvements with useful lives that extend past the current lease expiration, the decision to terminate a lease, or the decision to renew. As a result of the reassessment, an additional $3.5 million and $13.6 million of ROU asset and lease liabilities for the thirteen and twenty-six weeks ended June 28, 2023, respectively, were recognized and will be amortized over the new lease term. During the thirteen and twenty-six weeks ended June 29, 2022, the Company reassessed the lease terms on nine and 13 restaurants, respectively, due to certain triggering events, such as the addition of significant leasehold improvements with useful lives that extend past the current lease expiration, the decision to terminate a lease, or the decision to renew. This reassessment resulted in an additional $6.0 million and $8.5 million of ROU asset and lease liabilities for the thirteen and twenty-six weeks ended June 29, 2022, respectively, which 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 thirteen weeks ended June 29, 2022 which represented $0.7 million of the $6.0 million total additional ROU asset and lease liabilities for the period. 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 the twenty-six weeks ended June 28, 2023, the Company recorded a less than $0.1 million non-cash impairment charge primarily related to the carrying value of ROU assets of one restaurant in California. The Company did not record any non-cash impairment charge for the twenty-six weeks ended June 29, 2022. See Note 1, “Basis of Presentation and

Summary of Significant Accounting Policies – Impairment of Long-Lived Assets and ROU Assets” for additional information.

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. The Company utilizes a third-party valuation firm in determining the discount rate, based on the above assumptions. 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):


	Thirteen Weeks Ended
	June 28, 2023						June 29, 2022
	Property		Equipment				Property		Equipment
	Leases		Leases		Total		Leases		Leases		Total
Finance lease cost:
Amortization of right-of-use assets	$	19	$	—	$	19	$	18	$	1	$	19
Interest on lease liabilities		10		—		10		10		1		11
Operating lease cost		6,873		238		7,111		6,585		258		6,843
Short-term lease cost		—		1		1		—		4		4
Variable lease cost		130		203		333		171		149		320
Sublease income		(1,246)		—		(1,246)		(1,129)		—		(1,129)
Total lease cost	$	5,786	$	442	$	6,228	$	5,655	$	413	$	6,068


	Twenty-Six Weeks Ended
	June 28, 2023						June 29, 2022
	Property		Equipment				Property		Equipment
	Leases		Leases		Total		Leases		Leases		Total
Finance lease cost:
Amortization of right-of-use assets	$	37	$	1	$	38	$	37	$	1	$	38
Interest on lease liabilities		20		1		21		22		2		24
Operating lease cost		13,705		440		14,145		13,149		521		13,670
Short-term lease cost		—		4		4		—		8		8
Variable lease cost		272		436		708		307		267		574
Sublease income		(2,493)		—		(2,493)		(2,257)		—		(2,257)
Total lease cost	$	11,541	$	882	$	12,423	$	11,258	$	799	$	12,057

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


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	June 28, 2023		June 29, 2022		June 28, 2023		June 29, 2022
Lease cost – Occupancy and other operating expenses	$	6,048	$	5,912	$	12,057	$	11,742
Lease cost – General & administrative		133		105		269		210
Lease cost – Depreciation and amortization		19		18		38		37
Lease cost – Interest expense		10		11		21		24
Lease cost – Closed-store reserve		18		22		38		44
Total lease cost	$	6,228	$	6,068	$	12,423	$	12,057

During the twenty-six weeks ended June 28, 2023 and June 29, 2022, the Company had the following cash and non-cash activities associated with its leases (dollars in thousands):


	Twenty-Six Weeks Ended June 28, 2023								Twenty-Six Weeks Ended June 29, 2022
	Property			Equipment					Property			Equipment
	Leases			Leases			Total		Leases			Leases			Total
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for operating leases	$	13,814		$	269		$	14,083	$	13,543		$	495		$	14,038
Financing cash flows used for finance leases	$	47		$	29		$	76	$	58		$	28		$	86

Non-cash investing and financing activities:
Operating lease ROU assets obtained in exchange for lease liabilities:
Operating lease ROU assets	$	13,607		$	27		$	13,634	$	8,485		$	—		$	8,485
Finance lease ROU assets obtained in exchange for lease liabilities:
Finance lease ROU assets	$	—		$	—		$	—	$	—		$	28		$	28
Derecognition of ROU assets due to terminations, impairment or modifications	$	(40)		$	—		$	(40)	$	—		$	(24)		$	(24)

Other Information
Weighted-average remaining years in lease term—finance leases		17.37			2.71					18.37			3.68
Weighted-average remaining years in lease term—operating leases		10.74			3.13					11.01			1.19
Weighted-average discount rate—finance leases		2.57	%		1.53	%				2.57	%		1.53	%
Weighted-average discount rate—operating leases		4.81	%		4.05	%				4.47	%		3.82	%

Information regarding the Company’s minimum future lease obligations as of June 28, 2023 is as follows (in thousands):


	Finance Leases		Operating Leases
	Minimum		Minimum		Minimum
	Lease		Lease		Sublease
For the Years Ending	Payments		Payments		Income
December 27, 2023	$	76	$	14,077	$	2,032
December 25, 2024		151		27,598		3,942
December 31, 2025		147		25,676		3,461
December 30, 2026		114		23,302		3,097
December 29, 2027		104		21,838		3,053
Thereafter		1,479		133,575		21,368
Total	$	2,071	$	246,066	$	36,953
Less: imputed interest (1.53% - 4.81%)		(390)		(56,860)
Present value of lease obligations		1,681		189,206
Less: current maturities		(111)		(19,464)
Noncurrent portion	$	1,570	$	169,742

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 condensed consolidated statements 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 was 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 three 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.

The Company received $0.1 million of lease income from company-owned locations for each of the thirteen weeks ended June 28, 2023 and June 29, 2022. The Company received $0.1 million and $0.2 million of lease income from company-owned locations for the twenty-six weeks ended June 28, 2023 and June 29, 2022, respectively.