Restaurant Portfolio Optimization

9 Months Ended

Sep. 30, 2018

(4)

Restaurant Portfolio Optimization

During fiscal year 2018, the Company initiated a plan to review its restaurant portfolio. The restaurant portfolio optimization program included identifying certain of its company-operated restaurants that may be refranchised and certain of its underperforming company-operated restaurants that would be closed.

Restaurant closures and refranchising costs and related asset write-downs includes (a) the provision for closed stores, (b) the accretion of the present value of the Company’s rent obligations and ongoing maintenance and utilities costs related to company-operated restaurants the Company has previously closed, (c) impairment related to the write-down of assets associated with company-operated restaurants the Company expects to refranchise and (d) the net gain on the refranchise of company-operated restaurants. The following table details the components of Restaurant closures and refranchising costs and related asset write-downs during the thirteen and thirty-nine weeks ended September 30, 2018:


	Thirteen Weeks Ended September 30, 2018		Thirty-Nine Weeks Ended September 30, 2018
Provision for closed stores	$	11,770		11,770
Accretion of present value of future lease obligations		106		113
Impairment of company-operated stores expected to be refranchised		922		4,317
Net gain on refranchised company-operated restaurants		—		(77	)
Other costs		198		219

Restaurant closures and refranchising costs and related asset write-downs	$	12,996		16,342

Closed Stores

During the thirteen weeks ended September 30, 2018, the Company closed ten underperforming company-operated restaurants. In connection with the closure of these company-operated restaurants, the Company recorded a provision for closed stores of $11.8 million, net of amounts previously accrued, on the cease use date representing an estimate of the remaining obligations pursuant to non-cancelable leases, net of estimated sublease income. The assets related to these closed stores were impaired in prior periods.

As of September 30, 2018, the Company had several stores that were either closed and vacant or closed and subleased. The closed store obligation consists of the present value of remaining future minimum rent payments and estimated property tax payments under non-cancelable lease agreements for those stores that were either closed and vacant or closed and subleased, less the present value of estimated sublease income. Any resulting expense or income is included as a component of Restaurant closures and refranchising costs and related asset write-downs in the accompanying condensed consolidated statements of operations and comprehensive income as the stores are closed. Cash payments are scheduled to continue through fiscal year 2032.

The change in the closed store obligation during the thirty-nine weeks ended September 30, 2018 is as follows (in thousands):


Closed store obligation at December 31, 2017	$	246
Provision for closed stores		11,770
Amounts previously accrued for property taxes and deferred rent		422
Change in present value of future lease obligations		113
Cash payments for lease obligations, net of cash received on subleases		(267	)

Closed store obligation at September 30, 2018		12,284
Less current portion at September 30, 2018		(968	)

Noncurrent closed store obligation at September 30, 2018	$	11,316

Refranchising

During the thirteen weeks ended July 1, 2018, the Company refranchised two company-operated restaurants to an existing franchisee. In connection with this refranchising, the Company recorded a net gain of $0.1 million.

The Company expects to refranchise approximately 25 to 30 company-operated restaurants to another existing franchisee. The transaction, which remains subject to final negotiation and execution of a definitive purchase agreement, due diligence and customary closing conditions, is expected to close during fiscal year 2019. As a result of the expected refranchising, the Company recorded an impairment charge of $0.9 million and $4.3 million during the thirteen and thirty-nine weeks ended September 30, 2018, respectively, representing the write-down of the assets to their estimated fair value. The Company determined that no goodwill should be allocated to the disposal group. The $0.9 million additional write-down during the thirteen weeks ended September 30, 2018 was recorded in connection with the impairment of property and equipment due to changes in expected proceeds from the transaction. The $4.3 million impairment associated with the asset write-down during the thirty-nine weeks ended September 30, 2018 was comprised of $2.1 million related to franchise rights and $2.2 million related to property and equipment. These fair value measurements were based on Level 3 inputs, including discounted cash flow analyses. In anticipation of the expected refranchising, the Company reclassified $2.8 million of assets related to these company-operated restaurants to assets held for sale, which is included in Other current assets on the condensed consolidated balance sheets. In addition, the Company expects to record a pre-taxcharge of approximately $4.0 million to $5.0 million related to anticipated losses on operating leases associated with this potential refranchising transaction. Should this potential refranchising transaction fail to close, the Company will reassess its options under the restaurant portfolio optimization program.

Bojangles', Inc. 10-Q