Restaurants' financial reporting styles show transparency remains a little murky

Nation's Restaurant News,  July 2, 2007  by Alan J. Liddle

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I once marveled at Wendy's buns, but they are no longer a distraction.

Lest you get the wrong idea, this is not a masher column. This is about the wide range of financial reporting styles among publicly traded foodservice companies, or companies that have other means of financing that require disclosure.

NRN editors look through quite a few quarterly 10-Q and annual 10-K reports each year for news coverage and in compiling the annual Top 200 census. The final installment of the census, The Second 100, is due out July 23, so thoughts about reporting are top of mind. I won't pretend to be an expert on what companies actually are required to report under U.S. Securities and Exchange Commission rules or other relevant laws. That's accountant and attorney work and, apparently, an area of law that permits a vast difference of opinion regarding what must or should be detailed.

Wendy's International Inc., based in Dublin, Ohio, in 2006 ended a practice of reporting for SEC purposes only a blended "retail" sales number made up of company restaurant sales and sales of buns to franchisees. It now breaks out restaurant sales. Wendy's past practice struck some observers as a bit odd, as many, if not all, of its peers felt it appropriate to segregate restaurant and supply sales in their reports.

Consider the reports of Houston-based Landry's Restaurants Inc., and you'll see the minimalist approach.

Want a clear idea of how any of Landry's multiple concepts might be doing compared to others? Or are you interested in learning comparable-store sales trends by brand? Forget about finding such details in the company's quarterly or annual reports. To Landry's, for reporting purposes, Rainforest Cafe, with its kid-friendly menu and souvenir sales, is the same as Saltgrass Steak House or The Chart House waterfront fine-dining chain.

Apart from an aggregate, companywide restaurant sales line, a lump sum number for all the restaurants owned by the company and a few general concept facts, such as the percentage of alcohol sales by brand, Landry's has little to report about its restaurant operations.

Contrast Landry's reporting style with that of Darden Restaurants Inc., parent of Olive Garden and Red Lobster, among other concepts. Darden breaks out units and sales by concept and gives indications of comparable-store sales trends, among other details.

Outback Steakhouse parent OSI Restaurant Partners Inc., which recently went private, not only segregated data by brand, but also let you know how domestic operations compared to international activities. OSI, which I can only hope has incurred a form of debt that will see it continue filing reports, also detailed joint-venture and franchisee sales. That's a practice some franchisors have halted in the era of Sarbanes-Oxley and interpretations No. 46 and No. 51 by the Financial Accounting Standards Board, or FASB.

Among the companies that once reported franchisee sales, but no longer do so, are Jack in the Box Inc. and The Steak N Shake Co. Still reporting systemwide sales, or at least providing a franchisee's sales number in their SEC reports, are the likes of Hardee's and Carl's Jr. parent CKE Restaurants Inc., Papa John's International Inc. and Sonic Corp.

Some operators leave franchisee sales information out of Ks and Qs, but pass it along in press releases. McDonald's Corp. and casual-dining operator Red Robin Gourmet Burgers Inc. run with this crowd.

There are quirky reporting habits in the foodservice arena, such as the practice of showing the number of restaurants in operation when a report is written, as opposed to the number open at the end of the fiscal year in question. That's a specialty of The Cheesecake Factory Inc., among others.

And don't even ask me about the different manner in which companies are handling the FASB's Statement of Financial Accounting Standards No. 144 pertaining to "Accounting for the Impairment or Disposal of Long-Lived Assets," or discontinued operations. That could be a whole column by itself.

Suffice it to say that some companies provide in notes the unit counts and sales numbers needed by a reader to recreate what really went on during periods subsequently restated in accordance with SFAS 144 to eliminate the results of restaurants since closed, sold or held for disposal. Some do not. Luby's Inc., which as part of its turnaround has discontinued more than a few operations since 2003, is one of the companies that report all relevant information.

Without going on and on, I think it is safe to say that when it comes to financial reporting among restaurant companies, the styles and degrees of disclosure are as varied as the concepts generating the numbers.

The range of diversity, however, does seem to indicate that SEC reporting rules are not quite as hard and fast as some executives would have us believe, and that financial transparency apparently can be a little more opaque in certain cases.

Which is not to say that one approach is better than the other, as long as investors and regulators approve. But, at least from this reporter's vantage point, I must confess I'm relieved that I don't have to be distracted by Wendy's buns anymore.