What costs are included in the facility action charges, net, on Carls' Consolidated Statements of Operations?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
From time to time, we identify restaurants that have carrying values in excess of their fair values and, as a result, we may record impairment charges. We may also close or refranchise these or other restaurants and lease or sublease the restaurant property to a franchisee or to a business other than one of our restaurant concepts. The financial statement impact resulting from these and similar actions are recorded in our accompanying Combined Consolidated Statements oflncome as facility action charges, net and include:
- (i) impairment of restaurant-level long-lived assets for restaurants to be disposed of or held and used;
- (ii) store closure costs, including subleasing of closed facilities at amounts below our primary lease obligations; and
- (iii) gain or loss on the sale of restaurants, including refranchising transactions.
Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, closure costs, expected sublease income and refranchising proceeds. Accordingly, actual results could vary significantly from our estimates.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 79–80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, facility action charges, net, on the Combined Consolidated Statements of Income include several financial impacts related to restaurant performance and strategic decisions. These charges encompass (i) impairment of restaurant-level long-lived assets for restaurants to be disposed of or held and used, (ii) store closure costs, including subleasing of closed facilities at amounts below primary lease obligations, and (iii) gain or loss on the sale of restaurants, including refranchising transactions.
For a prospective Carls franchisee, understanding these charges is crucial because they reflect the financial consequences of underperforming or strategically realigned restaurants within the Carls system. Impairment charges indicate that the carrying value of certain restaurants' assets exceeds their fair value, potentially signaling operational or market challenges. Store closure costs can arise from decisions to close underperforming locations, and these costs may include expenses related to subleasing properties at rates lower than the original lease commitments. Gains or losses from restaurant sales, including refranchising, also factor into these charges, reflecting the financial outcomes of transferring ownership or operational control.
Carls management uses considerable judgment to estimate future cash flows, including those from continuing use, terminal value, closure costs, expected sublease income, and refranchising proceeds. This estimation process is inherently uncertain, and the FDD explicitly notes that actual results could significantly differ from these estimates. This uncertainty underscores the importance of due diligence for potential franchisees, as the financial health and strategic decisions of Carls can impact the overall stability and performance of the franchise system.
The inclusion of these items within facility action charges provides transparency into how Carls accounts for and manages its restaurant portfolio. Franchisees should pay close attention to these charges as they can indicate potential risks or opportunities within the system. Monitoring these charges over time can offer insights into Carls's strategic direction and its ability to optimize restaurant performance and asset values.