What factors does Hardees consider when estimating future cash flows for impairment analysis?
Hardees Franchise · 2025 FDDAnswer from 2025 FDD Document
for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, which is generally the individual restaurant level for fixed assets, finance lease assets and operating lease assets. For each asset group, we evaluate whether there are indicators of impairment such as sequential annual cash flow losses or adverse changes in the physical condition or expected use of the asset group. When indicators of impairment exist, we evaluate whether the assets are recoverable by comparing the undiscounted future cash flows that we expect to generate from their use and disposal to their carrying value. Restaurant-level assets that are not deemed to be recoverable are written down to their estimated fair value, which is determined by assessing the highest and best use of the assets and the amounts that would be received for such assets in an orderly transaction between market participants.
Our impairment analyses rely upon a number of estimates, assumptions and measurements with significant Level 2 and Level 3 unobservable inputs (see Note 13), including estimates of future cash flows, assumptions of future same-store sales and projected operating expenses for each of our restaurants over their estimated remaining useful lives in order to evaluate recoverability and estimate fair value. Future cash flows are estimated based upon experience gained, current intentions about refranchising or closing restaurants, recent and expected sales trends, internal plans, the period of time since the restaurant was opened or remodeled, the maturity of the related market and other relevant information.
Source: Item 21 — Financial Statements (FDD pages 84–85)
What This Means (2025 FDD)
According to Hardees's 2025 Franchise Disclosure Document, the company's impairment analyses involve several estimates, assumptions, and measurements. These include estimates of future cash flows, assumptions about future same-store sales, and projected operating expenses for each restaurant over its estimated remaining useful life. These factors are considered to evaluate the recoverability of assets and estimate their fair value.
Hardees estimates future cash flows based on several considerations. These include experience gained, intentions regarding refranchising or closing restaurants, recent and expected sales trends, internal plans, the period since the restaurant was opened or remodeled, the maturity of the market, and other relevant information. The company generally estimates the useful life of restaurants on owned property to be between 20 and 40 years. For restaurants subject to leases, the estimated useful life ranges from the end of the current lease term to the end of the lease term, including any option periods.
These estimates are critical for Hardees because if future cash flows or same-store sales do not meet or exceed forecasted levels, or if restaurant operating cost increases exceed forecasts and the company cannot recover these costs through price increases, the carrying value of certain restaurants may be unrecoverable. This could lead to additional impairment charges in the future, impacting the company's financial performance. For a franchisee, this highlights the importance of accurate forecasting and managing operating costs to ensure the long-term viability of their restaurant.
Furthermore, 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. The FDD notes that actual results could significantly vary from these estimates. This reliance on management judgment introduces an element of uncertainty and risk, as different judgments could lead to different outcomes in the impairment analysis.