Membership
MEMBERSHIP COLLECTIVE GROUP INC. Discussion and analysis of financial position and results of operations by management. (Form 10-K)
Management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes and other financial information included elsewhere in this Annual Report on Form 10-K. We have elected not to include a discussion of the earliest year. Such disclosure can be reviewed in item 7of the prior filing. Such discussion is not directly comparable due to an inconsistent constant currency basis which uses a different factor to convert the 2020 financial information within the prior filing In addition to historical financial information, this discussion and other parts of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, based upon current expectations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the "Risk Factors" section in this Annual Report on Form 10-K. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ from those anticipated. These statements are based upon information currently available to us, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. These statements are inherently uncertain, and investors are cautioned not to unduly rely upon these statements. Overview MCG is a global membership platform that connects a vibrant, diverse group of members from across the world. These members use the MCG platform to both work and socialize, to connect, create, have fun and drive a positive change. The central pillar of MCG is Soho House, which drives the majority of our membership and revenue today. A Soho House membership offers access to a network of distinctive and carefully curated Houses, across North America, the United Kingdom, Europe and Asia, which serve as the cornerstone of our member experience. We enhance our member experience through our digital channels, including the Soho House App and our website.
Over the last 28 years we have expanded our membership expertise and diversified our offerings – both physical and digital. As of January 1, 2023, we have approximately 226,800 members (including approximately 162,000 Soho House members) associated with MCG through our global portfolio of 40 Soho Houses, 9 Soho Works, Scorpios Beach Club in Mykonos, Soho Home, our
46 -------------------------------------------------------------------------------- interiors and lifestyle retail brand, and our digital channels. The Ned hotels in London, New York and Doha and the LINE and Saguaro hotels in North America also form part of MCG's wider portfolio via management agreements to operate the properties. Our membership expertise, honed through the growth of Soho House, has led to our evolution into the Membership Collective Group, a home to numerous memberships including Cities Without Houses, Soho Works, Soho Friends, and Ned's Club. By designing, curating and growing our membership offering, our membership platform can quickly and easily respond to shifting lifestyle trends and the evolution of our members' needs. Our memberships work together, allowing us to reach new audiences with a set of interconnected offerings. Our membership has remained resilient through multiple economic cycles and the COVID-19 pandemic. When our physical sites were forced to close as a result of the COVID-19 pandemic, there was minimal impact on the retention of Adult Paying Members. The power of our model is driven by the important role we believe that we play in our members' lives and the value we consistently provide them for their membership fees. We believe our retention compares favorably to leading consumer subscriptions or memberships-across music, media, fitness, entertainment and commerce-despite, in many cases, their significantly lower price points. The demand for our membership is also demonstrated by our large and growing MCG global wait list, which as of January 1, 2023 stands at over 86,000 applicants. Awareness of our distinct membership offerings and their scarcity is spread by our members organically through word of mouth, social media and press coverage. Further, we have observed a secular shift in the ways that people live and work-with less time spent in traditional corporate offices and more time in social spaces that encourage creativity and mutual engagement. We believe that these trends will only accelerate, and that the freedom to be able to choose where to live and work-particularly in light of the COVID-19 pandemic-will likely have a significant impact on our target market. We believe this will create an even greater demand for curated communities that can grow and thrive in a more deliberate environment.
For the year ended January 1, 2023, of our total revenue of $972 million, $273 million (28%) was membership revenue, $427 million (44%) internal revenue and $273 million Dollars (28%) on Other Revenue. For the year ended January 2, 2022, of our total revenue of $561 million, $189 million (34%) was membership revenue, $218 million (39%) internal revenue and $153 million dollars on other income (27%).
Membership revenues are comprised of annual membership fees and one-time legacy initial registration fees paid by new members, prior to April 4, 2022. From April 4, 2022, new admitted members have been required to purchase House Introduction Credits which will be redeemable within the first 3 months of membership against purchases of food and beverage items and bedroom stays at the Houses which will be recorded as In-House Revenues. Any unused amounts will be recognized as Membership Revenues. Refer to Item 8, Financial Statements and Supplementary Data, Note 2, Summary of Significant Accounting Policies-Basis of Presentation in this Annual Report on Form 10-K for further information on House Introduction Credits. In-House revenues include all revenues realized within our Houses, including food and beverage, accommodation, and spa products and treatments. We view Membership Revenues and In-House Revenues as interrelated, insofar as although there is no minimum spend for any member on our In-House offerings that generate In-House Revenues. In practice the significant majority of In-House Revenues are generated by our members, and the pricing of our In-House offerings reflects that accordingly, with pricing of such In-House offerings being identical for both members and non-members. Other revenues include all revenues not realized within our Houses, including Scorpios, Soho Works and stand-alone restaurants, design and procurement fees from Soho House Design and Soho Home and Cowshed retail products and other revenues from products and services that we provide outside of our Houses, as well as management fees from hotel management contracts for The Ned Sites and The LINE and Saguaro hotels. Our Membership Platform
All of our memberships are designed to enrich the lives of their members and expand our membership offering to a wider audience.
Soho house
Soho House remains at the core of our membership platform by creating a
foundation upon which additional membership businesses can be built and scaled.
While our physical Houses provide our foundation, the people inside them are the
soul of Soho House. As a membership founded for the creative industries, we are
proud to have championed members who have gone on to shape our cultural
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Landscape as world-class writers, artists, performers, directors, founders, designers and producers – all reflect the spirit and energy of Soho House.
The membership of each House is assembled by a select committee of influential creatives and innovators that represent the local area in which the membership is founded. Our members actively engage in creating the culture of each House, helping to shape and localize it by participating in member events and contributing to editorial and digital content. We believe this adds to the value of each House, enriching the membership and enhancing the attractiveness of membership to prospective members worldwide. With a new US Every House annual membership fee of approximately $4,500, providing access to all of our Houses globally, we believe our membership offering provides compelling value to our members that increases as we add new Houses and more members to our global community. Our Houses attract members from every demographic, with members from "Generation Z" (26 years old and younger) and "Millennials"(27- to 42-year-olds) constituting the fastest-growing cohorts. We also believe that the pricing of our In-House offerings represents great value to our members because of the level of quality provided, reinforcing the overall membership experience, rewarding their brand loyalty and creating opportunities for future and recurring revenues.
We have created the following types of memberships at Soho House to reach a wider audience and enhance the experience of our existing members:
•
cities without houses
In 2017, we introduced a new type of Soho House membership known as Cities
Without Houses ("CWH"), which opens up the Soho House membership to people who
live in cities where we do not yet have a physical House. This membership allows
us to welcome members to our global community in new geographies, generates
additional revenues on our existing base of Houses and provides intelligence for
future growth, which we have employed to open new Houses in certain locations,
including Nashville, US (February 2022), Brighton, UK (March 2022) Copenhagen,
Denmark (July 2022) and Stockholm, Sweden (December 2022). As of January 1,
2023, we have 6,800 CWH members across 73 cities.
•
Soho friends
There are a significant number of people who enjoy the Soho House way of living and who have already visited our Houses as guests, stayed in our bedrooms, or visited our public restaurants and spas, but do not currently have a Soho House membership. To respond to this audience, we launched Soho Friends in November 2020 for an annual subscription cost of $130. We offer access to physical spaces, including Soho House bedrooms, and screenings, with additional benefits from our restaurants, spas and online retail brands, although Soho Friends do not have full access to our Houses. As of January 1, 2023, we had 58,222 Soho Friends members. We intend to grow this membership brand in a measured way so that our Adult Paying Members continue to account for the majority of visitors to our Houses and restaurants.
Soho home
Soho Home was created as a result of the consistent requests from our members to
recreate the look and feel of the Houses in their own homes. Soho Home is an
interiors and lifestyle retail brand that offers handcrafted furniture,
lighting, textiles, tableware and accessories mostly through ecommerce. Over the
past few years, we have transformed Soho Home into a high growth retail
business. At the beginning of August 2022, we merged our SOHO HOME+ membership
into Soho Friends.
Soho Works
First launched in 2015, Soho Works provides its members with the space and
resources to work alongside other like-minded individuals and
businesses-facilitating connections and providing the tools to flourish. Aimed
primarily at existing Soho House and Soho Friends members, Soho Works draws on
the same design principles and membership ethos as Soho House, but is a space
purposed entirely for work and creative collaboration.
Beginning with one location in London, we have since opened eight additional
sites in London, New York and Los Angeles over the last two years and as of
January 1, 2023, we had 6,633 Soho Works members. Soho Works membership rates
vary by location and Soho House membership status. For Adult Paying Members, a
US Soho Works membership ranges from $400 to $750 per month, depending on
membership type.
Scorpios Beach Club
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-------------------------------------------------------------------------------- Set in a cove on the southern tip of Mykonos, Scorpios offers a one of a kind beach experience with a well-established globally recognized brand. With a restaurant, terraces and daybeds, and a distinctive wellness offering, Scorpios enriches the lives of its guests who are looking to escape from their daily lives. We believe the Scorpios concept has significant potential to expand into additional locations as a key part of our platform and we expect to open our second site in Tulum, Mexico in 2024.
the ned
The Ned brand seeks to embody a "city within a city" full-service destination,
by playing host to multiple restaurants, bedrooms, a range of grooming services,
spa, gym and a full-service members' club. The membership offered by The Ned
("Ned's Club") is aimed at a broader group of professional people. As of January
1, 2023, Ned's Club London has approximately 3,000 members. In June 2022, The
Ned NoMad in New York opened which covers 117,000 sq ft and includes a Ned's
Club, Cecconi's restaurant, as well as 167 bedrooms. As of January 1, 2023, The
Ned NoMad has over 1,600 members. The Ned in Doha opened in November 2022, which
as of January 1, 2023 had over 360 members. The Ned offers its members The Ned's
Club app, which allows members to make bookings, publish benefits, events and
club related information. We receive management fees under hotel management
contracts for each of the operations of The Ned sites.
The line
On June 22, 2021, we acquired the operating agreements relating to the 'The LINE' and 'Saguaro' hotels. The hotels that are currently operational are located in Los Angeles, Washington, Austin, Palm Springs, and San Francisco (opened September 2022), and among them offer a variety of food and beverage offerings together with approximately 1,500 hotel rooms. We receive management fees under hotel management contract for the operation of these hotels. The transaction has broadened our geographic reach in North America. Refer to Item 8, Financial Statements and Supplementary Data, Note 3 - Acquisitions for further information.
Factors affecting our business
We believe the coveted lifestyle brand we have created has significant and proven growth potential. This potential, combined with the stability of our membership base, we believe will enable us to maintain our position as an industry leader in the future. We expect to grow our member base by growing the number of Soho Houses, continuing to scale our existing membership brands and launching and growing new membership brands. We believe our track record in expanding and growing our platform will position us to achieve significant and sustained growth. A significant portion of our revenues is derived from House Revenues which consist of Membership Revenues and In-House Revenues. Our Membership Revenues, which are reflective of our steady and growing global brand, help to provide us with a recurring revenue base that limits the impact of fluctuations in regional economic conditions.
Our business and future performance are also affected by a variety of factors, including:
•
The ability to grow our member base. Long-term member growth is a direct driver of Membership Revenue growth and an important factor in In-House Revenue growth. The impact of long-term member growth on Membership Revenues can be particularly impactful to our earnings given the lower direct expenses associated with incremental Membership Revenues relative to our other revenue streams.
•
Our ability to grow In-House Revenues. In addition to their annual membership
fee, our members pay for goods and services that they consume, which we refer to
as In-House Revenues. We continue to actively develop the offerings in our Soho
Houses and our other membership brands to improve overall experience and capture
greater spend on food and beverage, accommodation, spa services, private events
and our other goods and services. We believe that the pricing of our In-House
offerings, which is reflective of the membership fees we receive from members
who consume most of our In-House offerings, represents great value to our
members for the level of quality provided, reinforcing the overall membership
experience, rewarding brand loyalty and creating the opportunity for future
revenue enhancement. Our proven ability to drive long-term member growth at
existing Houses is also an important contributing factor in sustaining In-House
Revenue growth.
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•
Our ability to adjust membership pricing. As we expand our number of Soho Houses globally and continue to invest in maintaining the quality of our existing Soho Houses, we are able to grow Membership Revenues by periodically reviewing our membership fee rates, as well as migrating members from Local House to Every House membership, which also has the effect of increasing Membership Revenues and offering new membership brands to join. Contrary to traditional hospitality companies which may experience brand dilution as they expand, the value of our membership and brand strengthens as we expand into new cities and properties and new membership brands. As we expand globally, the value of an Every House membership becomes more compelling to both new and existing members, enhancing our revenue potential. Historically, our membership price increases have not had a material impact on our retention rates and we believe this provides a strong indication of demand and price inelasticity for our memberships.
•
Our ability to grow our membership brands and products. We believe the strength of our brand and our culture of creativity and innovation will allow us to continue to capitalize on opportunities in complementary concepts and product lines and that our adjacent lines of business can achieve substantial stand-alone scale. Our expansion into new products and businesses can contribute meaningfully to our revenue in the future as we tap into our existing and growing membership base.
Reportable Segments
Our operations consist of three reportable segments (United Kingdom, North
America, Europe and Rest of the World ("ROW")) and one non-reportable segment
that we present as "All Other". Each of our segments includes all operations in
that region including our Houses and all associated facilities, spas and
stand-alone restaurants. Refer to Item 8, Financial Statements and Supplementary
Data, Note 21 - Segments in this Annual Report on Form 10-K for more information
on reportable segments.
Key performance and operational metrics evaluated by management
In evaluating our company’s performance, we consider a variety of operational and financial metrics. These key actions include:
NUMBER OF SOHO HOUSES. The number of Soho Houses reflects the total number of Soho Houses in operation in any period, irrespective of whether each House is (i) controlled by us, (ii) operated through a non-controlling interest in a joint venture or (iii) operated through a management contract.
We review member counts from all houses to assess new member growth, total house income, and house-level contribution.
NUMBER OF SOHO HOUSE MEMBERS. Our Soho House membership model is an integral
part of our business and has a significant impact on our profitability and
financial performance. Typically, members hold an Every House membership or a
Local House membership. Member count is the primary driver of Membership
Revenues and is also a critical factor in In-House Revenues as members utilize
the offerings that are provided within the Houses. Soho House members include
all active, frozen and non-paying members.
The extent to which we achieve growth in our membership base, retain existing
members and periodically increase our membership fee rates will impact our
profitability. We have historically enjoyed strong member loyalty, reflected by
very high retention rates. Robust demand for our memberships is also evidenced
by considerable wait lists for our Houses.
The year-over-year increase in our total number of Soho House Members is driven
by a combination of increases in membership at existing Houses and members from
new Houses.
SOHO HOUSE MEMBER RETENTION. Soho House Member Retention is defined as the
number of Adult Paying Members (being all Soho House members excluding child
members and complimentary members) at the beginning of a period less the number
of Adult Paying Members who canceled their membership during that same period
(without giving any effect to Adult Paying Members who froze their memberships
during such period), as a proportion of total Adult Paying Members at the
beginning of such period.
NUMBER OF OTHER MEMBERS. Other members include members of Soho Works and Soho
Friends are key to our growth strategy and enhancing our Soho House member
experience. Like Adult Paying members, other memberships are an integral part of
our business and we believe will have a significant impact on our profitability
and financial performance in the future.
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FROZEN MEMBERS. Frozen Members refers to Adult Paying Members who have elected
to suspend their membership payments on a six, nine- or twelve-month basis
during which period the member is not able to gain access to a Soho House site
as a member, access our membership Apps, or book bedrooms or Cowshed treatments
or products on discounted member rates. Frozen Members are not included in Adult
Paying Members, but are included in the total number of Soho House members.
MEMBERSHIP REVENUES. Membership Revenues are comprised of House Membership
Revenues (as defined below) and Non-House Membership Revenues (as defined
below). House Membership Revenues and Non-House Membership Revenues are each
comprised primarily of annual membership fees and one-time registration fees
which are amortized over 20 years. The one-time registration fee is no longer
applicable to new members admitted from April 4, 2022; see "House Introduction
Credits" below. Membership Revenues are a function of the number of members,
membership mix, and membership pricing. For GAAP, we report Membership Revenues
only from Houses and sites in which we own a controlling interest. Our
membership pricing varies by geographic segment and membership offering and, as
such, our mix of House and Soho Works club openings can affect our revenue
growth and profitability over time. Prices are generally higher in North America
and the ROW compared with the UK and Europe. Membership Revenues provide a
stable and recurring source of revenues which have few direct costs and, as
such, is a reliable and predictable source of cash flow.
HOUSE INTRODUCTION CREDITS. New members admitted from April 4, 2022 have been
required to purchase House Introduction Credits as part of their membership, per
the House rules. House Introduction Credits are credits of an equivalent value
to cash within Houses and are redeemable to purchase food and beverage items,
and bedroom stays, at the Houses. House Introduction Credits expire after the
first three months from the date of issuance, where legally permitted in the
regions we operate, if not utilized or if the Company terminates a member's
House membership. House Introduction Credits are recognized upon issuance as
deferred revenue on our consolidated balance sheets. Revenue from House
Introduction Credits are recognized as In-House revenues when redeemed by
members, and as breakage revenue within Membership revenues upon expiration or
in the period that we are able to reliably estimate expected breakage to the
extent that they are unredeemed, are recognized. House Introduction Credits
expire three months from the date of issue.
HOUSE MEMBERSHIP REVENUES. House Membership Revenues are comprised primarily of
annual membership fees and one-time legacy registration fees from Adult Paying
Members which are amortized over 20 years. The one-time registration fee is no
longer applicable to new members admitted from April 4, 2022; see "House
Introduction Credits" above.
IN-HOUSE REVENUES. In-House Revenues refer to all revenues realized within our
Houses, and primarily includes revenues from food and beverage, accommodation,
and spa products and treatments.
HOUSE REVENUES. House Revenues is defined as House Membership Revenues plus
In-House Revenues, less Non-House Membership Revenues. Our management views
House Membership Revenues and In-House Revenues as interrelated and their
aggregation as important in tracking House performance. Although there is no
minimum spend for any member on In-House offerings, in practice most members
consume food and beverage, accommodations and other offerings at our Houses. The
pricing of our In-House offerings is reflective of the fact that the significant
majority of In-House offerings that generate In-House revenues are consumed by
members who also pay a membership fee in relation to that House, with pricing of
such In-House offerings being identical for both members and non-members.
OTHER REVENUES. Other revenues are defined as total revenues that are not
realized within our Houses, including revenues from Scorpios, Soho Works and our
stand-alone restaurants, procurement fees from SHD, Soho Home and Cowshed retail
products and other revenues from products and services that we provide outside
of our Houses, as well as management fees from hotel management contracts for
The Ned Sites and the LINE and Saguaro hotels.
NON-HOUSE MEMBERSHIP REVENUES. Non-House Membership Revenues are comprised of
Soho Works membership revenues, Soho Friends membership revenue and SOHO HOME+
membership revenues, which was merged into Soho Friends membership at the
beginning of August 2022.
ACTIVE APP USERS. Active app users are unique users who have signed up for one of our membership apps in the last three months.
AVERAGE DAILY RATE ("ADR"). Average Daily Rate represents the average rental
income per paid occupied room. We believe this is a meaningful indicator of our
performance.
REVENUE PER AVAILABLE ROOM ("RevPAR"). The key industry standard for measuring
hotel-operating performance is RevPAR, which is calculated by multiplying the
percentage of occupied rooms to available rooms by the ADR realized. We believe
RevPAR is a meaningful indicator of our performance because it measures the
period-over-period change in room revenues for
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comparable properties. RevPAR may not be comparable to similarly titled
measures, such as revenues, and should not be viewed as necessarily correlating
with our revenue. We also believe occupancy and ADR, which are components of
calculating RevPAR, are meaningful indicators of our performance. Where this is
presented on a like-for like basis, RevPAR is adjusted for new or divested
sites, for example Houses that were not open in the comparison period.
Non-GAAP Financial Measures
We refer to Adjusted EBITDA, House-Level Contribution, House-Level Contribution
Margin, Other Contribution and Other Contribution Margin throughout this Annual
Report on Form 10-K, as we use these measures to evaluate our operating
performance and each of these measures is defined in "Non-GAAP Financial
Measures." We believe these measures are useful to investors in evaluating our
operating performance. Adjusted EBITDA, House-Level Contribution, House-Level
Contribution Margin, Other Contribution and Other Contribution Margin are all
supplemental measures of our performance that are neither required by, nor
presented in accordance with, GAAP. Adjusted EBITDA, House-Level Contribution,
House-Level Contribution Margin, Other Contribution and Other Contribution
Margin should not be considered as substitutes for GAAP metrics such as
Operating Loss and Net Loss or any other performance measure derived in
accordance with GAAP. Some of our financial and operational data that we
disclose in this Annual Report on Form 10-K are presented on a 'constant
currency' basis to isolate the effect of currency changes during the period.
Where we refer to a measure being calculated in 'constant currency', we are
calculating the USD change and the percent change as if the exchange rate that
is being used in the current period was in effect for the prior period
presented. We believe that this calculation provides a more meaningful
indication of actual year-over-year performance and eliminates the fluctuations
from currency exchange rates.
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KEY PERFORMANCE AND OPERATIONAL INDICATORS
As of
January 1, January 2, January 3,
2023 2022 2021
(Unaudited)
Number of Soho Houses 40 33 27
North America 14 11 9
United Kingdom 13 11 10
Europe/RoW 13 11 8
Number of Soho House Members 161,975 122,807 113,509
North America 60,439 45,733 42,722
United Kingdom 60,909 48,575 45,470
Europe/RoW 33,827 23,847 20,213
All Other 6,800 4,652 5,104
Number of Other Members 64,855 33,029 5,252
North America 17,864 7,944 769
United Kingdom 39,325 22,131 4,424
Europe/RoW 7,666 2,954 59
Number of Total Members 226,830 155,836 118,761
Number of Active App Users 168,641 119,677 77,226
For the Fiscal Year Ended For the Fiscal Year Ended
January 1, January 2, January 1, January 2,
2023 2022 2023 2022
Actuals Constant Currency(1)
(Unaudited, dollar amounts in thousands)
Membership Revenue growth year
over year 44 % 7 % 62 % n/m
North America 48 % (3 )% 48 % (3 )%
United Kingdom 28 % 9 % 44 % 2 %
Europe/RoW 50 % (2 )% 69 % (9 )%
All Other 68 % n/m 89 % 89 %
Operating loss $ (147,481 ) $ (188,026 ) $ (147,481 ) $ (167,282 )
Operating loss margin (15 )% (34 )% (15 )% (34 )%
House-Level Contribution 144,425 82,852 144,425 73,712
House-Level Contribution Margin 22 % 21 % 22 % 21 %
Other Contribution 52,524 1,710 52,524 1,521
Other Contribution Margin 17 % 1 % 17 % 1 %
Adjusted EBITDA 60,741 (23,969 ) 60,741 (21,325 )
Percentage of total revenues 6 % (4 )% 6 % (4 )%
(1)
See “Non-GAAP Financial Measures” for a discussion of our currency-neutral results.
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FINANCIAL YEARS ENDED 2 JANUARY 2022 AND 3 JANUARY 2021 COMPARISON
CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Year Ended
January 1, January 2, January 2,
2023 2022 2022
Constant
Actuals Currency(1)
(Dollar Constant
amounts in Currency
(Dollar amounts in thousands) Change % thousands) Change %(1)
(Unaudited)
Revenues
Membership revenues $ 272,809 $ 189,189 44 % $ 168,318 62 %
In-House revenues 426,602 217,934 96 % 193,892 n/m
Other revenues 272,803 153,431 78 % 136,505 100 %
Total revenues 972,214 560,554 73 % 498,715 95 %
Operating expenses
In-House operating expenses
(exclusive of depreciation and
amortization) (524,929 ) (308,840 ) (70 )% (274,769 ) (91 )%
Other operating expenses (exclusive
of depreciation and amortization) (250,336 ) (167,152 ) (50 )% (148,712 ) (68 )%
General and administrative expenses (123,435 ) (89,383 ) (38 )% (79,522 ) (55 )%
Pre-opening expenses (14,081 ) (21,294 ) 34 % (18,945 ) 26 %
Depreciation and amortization (99,930 ) (83,613 ) (20 )% (74,389 ) (34 )%
Share-based compensation (27,681 ) (26,660 ) (4 )% (23,719 ) (17 )%
Foreign exchange loss, net (69,600 ) (25,541 ) n/m (22,723 ) n/m
Other (9,703 ) (26,097 ) 63 % (23,218 ) 58 %
Total operating expenses (1,119,695 ) (748,580 ) (50 )% (665,997 ) (68 )%
Operating loss (147,481 ) (188,026 ) 22 % (167,282 ) 12 %
Other (expense) income
Interest expense, net (71,499 ) (84,382 ) 15 % (75,073 ) 5 %
Gain on sale of property and other,
net 390 6,837 (94 )% 6,083 (94 )%
Share of income (loss) of equity
method investments 3,941 (2,249 ) n/m (2,001 ) n/m
Total other expense, net (67,168 ) (79,794 ) 16 % (70,991 ) 5 %
Loss before income taxes (214,649 ) (267,820 ) 20 % (238,273 ) 10 %
Income tax expense (5,131 ) (894 ) n/m (795 ) n/m
Net loss (219,780 ) (268,714 ) 18 % (239,068 ) 8 %
Net (income) loss attributable to
noncontrolling interest (800 ) 3,319 n/m 2,953 n/m
Net loss attributable to Membership
Collective Group Inc. $ (220,580 ) $ (265,395 ) 17 % $ (236,115 ) 7 %
(1)
See "Non-GAAP Financial Measures-Constant Currency" for an explanation of our
constant currency results.
(2)
In-House operating expenses is exclusive of depreciation and amortization of
$55,587 and $53,568 ($55,587 and $47,658 in constant currency) for the fiscal
years ended January 1, 2023 and January 2, 2022, respectively.
(3)
Other operating expenses is exclusive of depreciation and amortization of
$30,262 and $23,831 ($30,262 and $21,202 in constant currency) for the fiscal
years ended January 1, 2023 and January 2, 2022, respectively.
OVERVIEW
While the COVID-19 pandemic continued to impact our results in first quarter
fiscal 2022, we saw significant improvements in trading conditions across the
remaining three quarters, across our Houses and other businesses following the
removal of many restrictions in the majority of our regions. Further, despite
inflationary pressures and a difficult labor market we saw a net loss reduction
year-on-year and successfully opened seven new Soho Houses in Nashville,
Brighton (UK), Los Angeles, London, Copenhagen, Stockholm and Miami.
During fiscal 2022, our global number of Soho House members increased by 39,168,
or 32%, and we gained 1,617 Soho Works members and 30,209 Soho Friends, net of
the conversion of HOME+ members in August 2022. Adult Paying Members increased
by over 34,000 and our frozen members decreased further from 4,454 members to
2,256, below pre-pandemic levels. Due to the increase in Adult paying members
and our Non-House members across fiscal 2022, Membership revenues increased by
$83,620, or 44%.
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Total In-House revenues increased by $208,668 in fiscal 2022, or 96% as a result
of fewer COVID-related restrictions in comparison to fiscal 2021, particularly
after first quarter fiscal 2022. Revenues were also boosted by an additional
seven Soho Houses opened throughout fiscal 2022 as well as a full year of
In-House revenues for the five Soho Houses in fiscal 2021. Other revenues
increased by 78% in fiscal 2022 predominantly due to fewer COVID-related
restrictions being in place in comparison to fiscal 2021, resulting in higher
revenues from our restaurants, townhouses and Scorpios during the summer months,
as well as growth in our retail offerings year-on-year. We also acquired the
operating agreements relating to the LINE and Saguaro hotels in June 2021, which
also drove the increase in Other revenues due to the additional management fee
income for a full fiscal period, as well as management fees from the Ned New
York and Ned Doha which opened in June 2022 and November 2022 respectively.
Operating loss decreased by $40,545 to $147,481 in fiscal 2022 primarily due to
increased Membership revenues year-on-year coupled with higher trading volumes.
Although we saw higher In-House and Other operating expenses year-on-year in
line with higher activity and inflationary pressures, both House-Level
Contribution and Other Contribution increased in fiscal 2022, primarily as a
result of improved trading conditions, selective price increases and higher
Membership revenues.
Net loss attributable to Membership Collective Group decreased to $220,580 in
fiscal 2022 from $265,395 in fiscal 2021. Adjusted EBITDA increased from a loss
of $23,969 in fiscal 2021 to a gain of $60,741 in fiscal 2022 following
normalization of trading activity levels post-COVID-19 and increased Membership
revenues year-on-year.
TOTAL REVENUES
For the Fiscal Year Ended Percent Change
January 1, January 2, Constant
2023 2022 Actuals Currency(1)
(Dollar amounts in thousands)
(Unaudited)
Total revenues $ 972,214 $ 560,554 73 % 95 %
North America 389,124 226,708 72 % 72 %
United Kingdom 299,929 173,499 73 % 94 %
Europe/RoW 135,104 67,923 99 % n/m
All Other 148,057 92,424 60 % 80 %
(1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
MEMBERSHIP REVENUES
For the Fiscal Year Ended Percent Change
January 1, January 2, Constant
2023 2022 Actuals Currency(1)
(Dollar amounts in thousands)
(Unaudited)
Membership revenues $ 272,809 $ 189,189 44 % 62 %
North America 133,889 90,433 48 % 48 %
United Kingdom 76,507 59,722 28 % 44 %
Europe/RoW 26,287 17,496 50 % 69 %
All Other 36,126 21,538 68 % 89 %
(1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
Membership revenue was $272,809 for FY2022 compared to $189,189 for FY2021, an increase of $83,620 or 44%.
Growth was primarily driven by an increase of over 34,800 Adult Paying Members
spread across all segments, including over 9,300 additional Adult Paying Members
from Houses opened during fiscal 2022. Additionally, the Soho House Every House
membership fee was increased at the start of fiscal 2022, which impacted new
Every House members on the date they joined and existing Every House members on
their renewal date. In constant currency, Membership revenues increased by
$104,492, or 62%.
Membership revenues in our North America segment increased by $43,456 or 48%,
which was predominantly driven by an additional approximately 13,300 Adult
paying members at the end of the fiscal 2022 versus the prior year, coupled with
Every House membership fee increases. The increase in Adult paying members was
driven by membership intakes across all existing Houses as well as at the three
new Houses opened during fiscal 2022.
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Membership revenues in the United Kingdom segment increased by $16,785, or 28%,
due to the opening of Brighton Beach House in March 2022 and Little House Balham
in July 2022, as well as membership increases across all existing Houses,
resulting in an increase in Adult Paying members in the United Kingdom of
approximately 12,000 versus year end fiscal 2021. In constant currency,
Membership revenues in the United Kingdom segment increased by $23,374, or 44%.
Membership revenues in the Europe/RoW segment increased by $8,791, or 50%, due
to an increase of approximately 7,000 Adult paying members, driven by membership
increases across all Houses, particularly at our new and maturing sites, Soho
House Paris (September 2021), Soho House Rome (October 2021), Soho House
Copenhagen (July 2022) and in part by Soho House Stockholm which opened in
December 2022 and Soho House Hong Kong as the city restrictions reduced in the
second half of fiscal 2022. In constant currency, Membership revenues in the
Europe/ROW segment increased by $10,721, or 69%.
The increase in Membership revenues in All Other of $14,588 is primarily driven
by an additional approximately 31,800 Non-House members (being Soho Works
members, Soho Friends and SOHO HOME+ members, which was merged into Soho Friends
membership at the beginning of August 2022) versus year end fiscal 2021, as well
as an increase of approximately 2,000 Cities Without Houses Adult paying members
year on year. Cities Without Houses members were subject to the same membership
fee increases during the year as Every Houses members. In constant currency,
Membership revenues in All Other increased by $16,964, or 89%.
IN-HOUSE REVENUES
For the Fiscal Year Ended Percent Change
January 1, January 2, Constant
2023 2022 Actuals Currency(1)
(Dollar amounts in thousands)
(Unaudited)
In-House revenues $ 426,602 $ 217,934 96 % n/m
North America 190,176 101,298 88 % 88 %
United Kingdom 166,016 88,987 87 % n/m
Europe/RoW 70,410 27,649 n/m n/m
(1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
In-House revenues were $426,602 for fiscal 2022, compared to $217,934 for fiscal 2021, an increase of $208,668, or 96%. The increase was predominantly driven by an easing of COVID-related restrictions after first quarter fiscal 2022, the seven new Soho Houses which opened during fiscal 2022 as well as a full year of our five fiscal 2021 House openings. Additionally higher spend at our existing Houses opening pre fiscal 2021, also boosted sales further. Throughout the year 2021, our Houses were subject to various different trading restrictions, whereas in fiscal 2022 we saw minimal restrictions, mainly only in first quarter fiscal 2022, apart for Soho House Hong Kong where Government-imposed COVID-related restrictions, for a significant proportion of fiscal 2022. This meant increases in sales volumes compared to fiscal 2021 on a like-for-like basis. In constant currency, In-House revenues increased by $232,710. North America saw In-House revenues increase by $88,878, or 88%, due to fewer trading restrictions versus fiscal 2021 where sites were operating at reduced capacity and vaccine mandates for much of the year, thus 2022 sales volumes increased year-on-year. Selective price rises across food, beverage and accommodation in the second half of fiscal, as well as the opening of Soho House Nashville in February 2022 and Holloway House in May 2022 further contributed to the increase in In-House revenues versus fiscal 2021.
Our UK segment saw an increase in in-house revenue of $77,029, or 87%, driven by fewer COVID-related restrictions year-on-year, representing an increase in sales volumes, as well as additional revenue from Brighton Beach House and Little House Balham. London, which opened in May 2022 and July 2022 respectively. At constant exchange rates, internal revenue increased by $86,846.
Europe/ROW sites struggled throughout fiscal 2021 with more restrictions in the
region compared to the UK and North America, meaning growth year-on-year in
fiscal 2022 was significant, with an increase of $42,761. Year-on-year In-House
revenues growth was further amplified by a full year of trading for the three
new Houses opened in the region in the second half of fiscal 2021, Soho House
Tel Aviv (August 2021), Soho House Paris (September 2021) and Soho House Rome
(October 2021). Additionally we opened Soho Houses in Copenhagen and Stockholm
in July and December 2022, respectively, which further contributed to revenue
growth year-on-year. In constant currency, In-House revenues increased by
$45,811.
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OTHER REVENUES
For the Fiscal Year Ended Percent Change
January 1, January 2, Constant
2023 2022 Actuals Currency(1)
(Dollar amounts in thousands)
(Unaudited)
Other revenues $ 272,803 $ 153,431 78 % 100 %
North America 64,983 34,978 86 % 86 %
United Kingdom 57,310 24,790 n/m n/m
Europe/RoW 38,408 22,778 69 % 90 %
All Other 112,102 70,885 58 % 78 %
(1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
Other revenues were $272,803 for fiscal 2022, compared to $153,431 for fiscal 2021, an increase of $119,372, or 78%. This was predominantly driven by reduced COVID-related restrictions in fiscal 2022 in contrast to fiscal 2021, meaning increased sales volumes at our public restaurants in North America and the United Kingdom, as well as at Scorpios Beach Club, Mykonos. Stronger revenues from our retail offerings and revenues from an additional restaurant in Palm Springs and from management fees from the Ned NoMad, which opened in June 2022, and Ned Doha, which opened in November 2022, which also boosted Other revenues growth year-on-year.
At constant exchange rates, other income increased $136,299.
The North America segment Other revenues increased year-on-year due to better
performance of our existing restaurants following reduced COVID-related
restrictions and prices rises across our food and beverage offerings versus
fiscal 2021. In addition to this, Other revenues benefited from the acquisition
of the remaining 50% share of the Mandolin restaurant in the second quarter of
fiscal 2021 and full consolidation of the restaurant's financial results in
fiscal 2022. Lastly, the North America segment as also seen Other revenues
increase year-on-year due to a full year of management fees earned from the LINE
and Saguaro versus fiscal 2021, and additional management fees from the Ned
NoMad that opened in June 2022.
Similarly, the increase in Other revenues of $32,520 in the United Kingdom
segment are predominantly driven by increased footfall at our restaurants
following the reduction in social distancing restrictions relative to fiscal
2021, coupled with selective price increases across our food and beverage
offerings. Additionally, we saw as a stronger average daily rate and higher
occupancy at the two London townhouses which meant RevPAR increased 48%, or to
$330 from $223, compared to fiscal 2021.
The Europe/RoW segment saw a strong revenue increase year on year as a result of
a very successful season at Scorpios Beach Club, which benefited from fewer
restrictions in fiscal 2022 as well as opening for the season two weeks earlier
compared to fiscal 2021. In constant currency, Other revenues in the Europe/RoW
segment increased $18,143 or 90%.
Growth in Other revenues in All Other was driven predominantly by improved
performance of our Soho Home segment year on year with sales up 97%,
predominantly driven by online purchases and the opening of two new Soho Home
stores in London and Los Angeles in fiscal 2022. Additionally, in fiscal 2022 we
received a lease promote following the sale of our Paris property by the
landlord of $4 million. As part of our lease agreements, we often include a
promote clause to ensure a share of any gain in the value of the property during
our tenancy. In constant currency, Other revenues in All Other increased $49,037
or 78%.
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OWN OPERATING EXPENSES AND CONTRIBUTION AT HOUSE LEVEL
For the Fiscal Year Ended Percent Change
January 1, January 2, Constant
2023 2022 Actuals Currency(1)
(Dollar amounts in thousands)
(Unaudited)
In-House operating expenses $ (524,929 ) $ (308,840 ) (70 )% (91 )%
Percentage of total House
revenues (78 )% (79 )%
Operating loss $ (147,481 ) $ (188,026 ) 22 % 12 %
Operating loss margin (15 )% (34 )%
House-Level Contribution $ 144,425 $ 82,852 74 % 96 %
House-Level Contribution Margin 22 % 21 % 1 %
House-Level Contribution by
segment:
North America $ 83,134 $ 43,765 90 % 90 %
United Kingdom 55,609 34,513 61 % 81 %
Europe/RoW (2,810 ) 145 n/m n/m
All Other 8,492 4,429 92 % n/m
House-Level Contribution Margin
by segment:
North America 26 % 23 %
United Kingdom 23 % 23 %
Europe/RoW (3 )% 0 %
All Other 85 % 64 %
(1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
IN-HOUSE OPERATING EXPENSES. In-House operating expenses were $524,929 for
fiscal 2022, compared to $308,840 for fiscal 2021, an increase of $216,089, or
70%. The increase is primarily a result of new Houses and fewer capacity
restrictions related to the COVID-19 pandemic in 2022 and the associated
increase in sales volumes. This was coupled with wage inflation and retention
incentives across all regions, as well as energy increases in the United
Kingdom, the cost of which doubled at our UK Houses versus fiscal 2021.
The increase in In-House Operating Expenses was offset by an out-of-period
adjustment correcting an error with respect to the estimation of the operating
lease liability identified during the 13 week period ended July 3, 2022 but
relating to the 13 week period ended April 3, 2022 and fiscal years 2022, 2020
and 2019. Refer to Note 2, Summary of Significant Accounting Policies-Basis of
Presentation for further information.
In fiscal 2022, as a result of the continued impact from the COVID-19 pandemic,
governmental agencies in the European Union provided grants primarily to retain
on payroll workers that would have otherwise been terminated and were instead
furloughed in accordance with the rules of the applicable national scheme. Such
government grants, which under their terms meant that the furloughed employees
were prohibited by law from providing the Company with services but kept on
payroll rather than being terminated to claim unemployment benefits, totaled
$0.7 million in fiscal 2022, and are presented as a reduction of payroll
expenses within In-House Operating Expenses. Under the rules of the schemes, we
applied to the relevant government agency and recovered the costs of furloughed
employees. The net payroll expense within In-House Operating Expenses therefore
only reflects the costs incurred from staff that were not furloughed and hence
provided revenue generating services. In constant currency, In-House operating
expenses increased by $250,160, or 91%.
HOUSE-LEVEL CONTRIBUTION. House-Level Contribution, which is defined as House
Revenues less In-House operating expenses, was $144,425 for fiscal 2022,
compared to $82,852 for fiscal 2021, an increase of $61,573, or 74%. This
increase was primarily driven by an increase in Soho House membership revenues
and In-House revenues versus the prior year, offset by an increase in operating
expenses following the opening of seven new Houses in the year and increased
sales volumes in comparison to fiscal 2021. In constant currency, House-Level
Contribution increased by $70,713, or 96%.
House-Level Contribution Margin increased by 1% versus fiscal 2021 to 22% . This
improvement in margin was predominantly driven by an increase in Soho House
membership revenues year on year, which is a direct flow through to margin, as
well as increased sales year-on-year following the lessening of COVID-related
restrictions. This was partially offset by the dilutive impact of seven new
Houses in fiscal 2022 which tend to have a negative contribution in the first
year of operation and increases costs associated with increased trading which
were amplified by cost pressures, particularly with regards to wages.
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OTHER OPERATING EXPENSES AND OTHER CONTRIBUTIONS
For the Fiscal Year Ended Percent Change
January 1, January 2, Constant
2023 2022 Actuals Currency(1)
(Dollar amounts in thousands)
(Unaudited)
Other operating expenses $ (250,336 ) $ (167,152 ) (50 )% (68 )%
Percentage of total other revenues 88 % (99 )%
Operating loss $ (147,481 ) $ (188,026 ) 22 % 12 %
Operating loss margin (15 )% (34 )%
Other Contribution $ 52,524 $ 1,710 n/m n/m
Other Contribution Margin 17 % 1 % 16 %
Other Contribution by segment:
North America $ 14,964 $ 9,323 61 % 61 %
United Kingdom 20,998 1,198 n/m n/m
Europe/RoW 14,844 6,106 n/m n/m
All Other 1,718 (14,917 ) n/m n/m
Other Contribution Margin by segment:
North America 22 % 26 %
United Kingdom 35 % 5 %
Europe/RoW 38 % 27 %
All Other 1 % (18 )%
(1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
OTHER OPERATING EXPENSES. Other operating expenses were $250,336 for fiscal 2022, compared with $167,152 for fiscal 2021, an increase of $83,184, or 50%. This increase is primarily driven by the lessening of COVID-19 related trading restrictions versus fiscal 2021, costs in relation to the LINE & Saguaro and Mandolin properties in North America, and the increase in volumes for Soho Home. In addition, Scorpios Beach Club, Mykonos opened 2 weeks earlier in fiscal 2022 and saw much higher sales volumes year-on-year. In constant currency, Other operating expenses increased by $101,624 or 68%. OTHER CONTRIBUTION. Other Contribution, which we define as Other revenues plus Non-House Membership Revenues less Other operating expenses, was $52,524 for fiscal 2022, compared to $1,710 for fiscal 2021, an increase of $50,814. In constant currency, Other Contribution improved by $51,003. Other Contribution Margin was 17% for fiscal 2022, an improvement from 1% in fiscal 2021. The improvement in Other Contribution and Other Contribution Margin was predominantly driven by the impact of COVID-related restrictions lifting across sites across the year having a notable impact at our restaurants and townhouses in the United Kingdom and North America segment as well as improved margin at Scorpios Beach club, Mykonos. Additionally Non-House membership revenues increased 95% year on year which has a direct flow through to Other Contribution and Margin. Other Contribution and Margin improvement in All Other was predominantly due to increases in Non-House membership fees at Soho Works, the lease promote gain in relation to the Soho House Paris property, and higher margin design fees from Soho House Design year-on-year.
GENERAL AND ADMINISTRATIVE EXPENSES
For the Fiscal Year Ended Percent Change
January 1, January 2, Constant
2023 2022 Actual Currency(1)
(Dollar amounts in thousands)
(unaudited)
General and administrative expenses $ 123,435 $ 89,383 38 % 55 % Percentage of total revenues 13 % 16 % (1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
General and administrative expenses were $123,435 for fiscal 2022 compared to $89,383 for fiscal 2021, an increase of $34,052 or 38%. The increase was mainly driven by wage increases for existing employees from February 2022, combined with an increase
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headcount and other costs as a result of the removal of many COVID-related
restrictions across the various regions that were in place in fiscal 2021, as
well as costs and headcount to support business expansion, including the seven
new Soho Houses opened in fiscal 2022.
In constant currency, General and administrative expenses increased by $43,913,
or 55%.
PRE-OPENING EXPENSES
For the Fiscal Year Ended Percent Change
January 1, January 2, Constant
2023 2022 Actual Currency(1)
(Dollar amounts in thousands)
(Unaudited)
Pre-opening expenses $ 14,081 $ 21,294 (34 )% (26 )%
Percentage of total revenues 1 % 4 %
(1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
Pre-opening expenses were $14,081 for fiscal 2022, driven by the opening of
seven new Houses during the year. This is a decrease of $7,213, or 34% versus
fiscal 2021, which is predominantly driven by better costs control and timing
and size of new House openings. In constant currency, Pre-opening expenses
decreased by 26%.
DEPRECIATION AND AMORTIZATION
For the Fiscal Year Ended Percent Change
January 1, January 2, Constant
2023 2022 Actual Currency(1)
(Dollar amounts in thousands)
(Unaudited)
Depreciation and amortization $ 99,930 $ 83,613 20 % 34 %
Percentage of total revenues 10 % 15 %
(1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
Depreciation and amortization was $99,930 for fiscal 2022, compared with $83,613 for fiscal 2021, an increase of $16,317, or 20%. This increase was primarily driven by amortization of capitalized IT development costs, partly related to the development of the Soho House App, as well as a full year of depreciation associated with our five Soho House openings in fiscal 2021 and seven additional Houses in 2022. In constant currency, Depreciation and amortization expenses increased by $25,541, or 34%.
SHARE-BASED COMPENSATION, FOREIGN EXCHANGE AND OTHER
For the Fiscal Year Ended Percent Change
January 1, January 2, Constant
2023 2022 Actual Currency(1)
(Dollar amounts in thousands)
(Unaudited)
Share-based compensation $ 27,681 $ 26,660 4 % 17 %
Percentage of total revenues 3 % 5 %
Exchange rate loss, net $69,600 $25,541
n/m n/m Percentage of total revenues 7 % 5 % Other $ 9,703 $ 26,097 (63 )% (58 )% Percentage of total revenues 1 % 5 % (1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
Share-based compensation expense, which is a non-cash item, increased by $1,021
to $27,681, driven by new awards. This has been offset, in part, by
non-recurring expenses in the prior year and by foreign exchange movements. In
constant currency the expense increased by 17% driven by new grants of Share
Appreciation Rights and Restricted Stock Units as well as a one-time expense of
$2 million in connection to the repricing of certain Share Appreciation Right to
a lower strike price. The full impact was partly offset by a one-time
acceleration expense in the comparative period of vesting by one year triggered
by the IPO for certain outstanding awards which was in accordance with the
original award terms.
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Net foreign exchange loss increased $44,059 to $69,600 for fiscal 2022 primarily due to an increase in non-USD working capital as a result of our overseas growth, foreign exchange volatility affecting our non-USD denominated debt and working capital .
Other expense decreased by $16,394 to $9,703 for fiscal 2022, driven primarily
by costs incurred in fiscal 2021 associated with our Goldman Sachs Senior
Secured Note facility in March 2021 and July 2021 IPO of $16 million. In the
current fiscal year, the expense primarily related to $4 million of expenses
incurred with respect to an internal strategic reorganization program of the
Company's support and operations teams and $1 million expense incurred with
respect to a historic settlement of an employment related legal claim. The
Company has remediated its operating processes to mitigate a similar issue from
recurring.
INTEREST EXPENSE, NET
For the Fiscal Year Ended Percent Change
January 1, January 2, Constant
2023 2022 Actual Currency(1)
(Dollar amounts in thousands)
(Unaudited)
Interest expense, net $ 71,499 $ 84,382 (15 )% (5 )%
Percentage of total revenues 7 % 15 %
(1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
Net interest expense was $71,499 for fiscal 2021, compared with $84,382 for fiscal 2020, a decrease of $12,883 or 15%. This decrease is predominantly driven by foreign exchanges movements as in constant currency net interest expense decreased by only $3,574, or 5%. There were a number of one off charges in fiscal 2021 which have inflated the prior year comparison including $9 million loss on extinguishment of the Permira Senior Facility, in addition to a $5 million exit fee on the Senior Facility triggered by the IPO transaction in fiscal 2021. This is offset in part by the incremental interest expense incurred following issuance of $100 million additional notes in March 2022 under the Goldman Sachs Senior Secured Note facility.
PROFIT FROM SALE OF REAL ESTATE AND OTHER, NET
The Company recognized Gains on disposal of property and other, net of $390 and
$6,837 during fiscal 2022 and fiscal 2021, respectively. The decrease year over
year is primarily driven by the fiscal 2021 gain on disposal of property and
other, net mainly related to the acquisition of the remaining 50% of ownership
interest in Soho House-Cipura (Miami), LLC., which owns and operates the
Mandolin Aegean Bistro, located in Miami, Florida ("Cipura (Miami), LLC"). The
non-cash gain was related to the remeasurement of our existing 50% ownership to
fair value as part of the initial consolidation of Cipura (Miami), LLC after
acquisition in May 2021.
SHARE OF INCOME (LOSS) FROM EQUITY METHOD INVESTMENTS
We maintain a portfolio of equity method investments owned and operated through non-controlling interests in investments with one or more partners. Two of our Houses are owned and operated by us through non- controlling interests and we own and operate certain of our other businesses through non-controlling interest in joint ventures. The Company recognized share of income of equity method investment of $3,941 during fiscal 2022, a decrease of $6,190 on fiscal 2021. In fiscal 2021, Cipura (Miami), LLC was recognized as a joint venture; however, following the completion of the acquisition in May 2021, the Company began to fully consolidated Cipura (Miami), LLC in its results which contributed to the decrease of share income (loss) of equity method investments.
INCOME TAX EXPENSES
Income tax expense was $5,131 for fiscal 2022 compared to an expense of $894 for
fiscal 2021, an increase in expense of $4,237. This increase was driven by taxes
payable in foreign jurisdictions, specifically Greece and Canada, following a
return to profitability. In fiscal 2021, owing to the impact of COVID on the
profitability of our operations in Greece, Germany and Canada, where we
historically pay cash taxes on their profits, we experienced a decrease in tax
paid owing to the decreased profitability associated with the impact of COVID on
our operations.
NET LOSS ATTRIBUTABLE TO MCG
Net loss attributable to MCG was $220,580 for fiscal 2022, compared with Net
loss attributable to MCG of $265,395 for fiscal 2021, a decrease in loss of
$44,815. This was attributable primarily to improvement in trading following
reduced COVID-related restrictions year-on-year coupled with significant
increase in Membership revenues.
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ADJUSTED EBITDA
For the Fiscal Year Ended Percent Change
January 1, January 2, Constant
2023 2022 Actual Currency(1)
(Dollar amounts in thousands)
(Unaudited)
Adjusted EBITDA $ 60,741 $ (23,969 ) n/m n/m
Percentage of total revenues 6 % (4 )%
(1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
Adjusted EBITDA improved by $84,710 from a loss of $23,969 in fiscal 2021 to $60,741 in fiscal 2022. This significant increase was predominantly driven improved performance across the business following the reduction in COVID-related restrictions versus fiscal 2021, coupled with increased Membership revenues from both Soho House and Non-House members which helped improve House and Other Contribution margins year-on-year. Strong revenue growth was partially offset by an increase in Operating and General and administrative expenses year-on-year as a result of higher trading volumes, the additional seven Soho Houses added to the portfolio in fiscal 2022 and a reduction in government grants year-on-year.
At constant currencies, Adjusted EBITDA increased $82,066.
For a reconciliation of Adjusted EBITDA to Net Loss, see Non-GAAP Financial Measures.
NON-GAAP FINANCIAL MEASURES
A reconciliation of Net Loss to Adjusted EBITDA is set forth below for the
periods specified:
For the Fiscal Year Ended Percent Change
January 1, January 2,
2023 2022 Constant
Actuals Actuals Actuals Currency(1)
(Unaudited, dollar amounts in thousands)
Net loss $ (219,780 ) $ (268,714 ) 18 % 8 %
Depreciation and amortization 99,930 83,613 20 % 34 %
Interest expense, net 71,499 84,382 (15 )% (5 )%
Income tax expense 5,131 894 n/m n/m
EBITDA (43,220 ) (99,825 ) 57 % 51 %
Gain on sale of property and other,
net (390 ) (6,837 ) 94 % 94 %
Share of (income) loss of equity
method investments (3,941 ) 2,249 n/m n/m
Foreign exchange(2) 69,600 25,541 n/m n/m
Share of equity method investments
adjusted EBITDA 7,577 4,662 63 % 83 %
Adjusted share-based compensation
expense(2) (3) 25,101 26,660 (6 )% 6 %
Operational reorganization and
severance expense(4) 9,339 - n/m n/m
Membership credits expense(5) 1,201 7,923 (85 )% (83 )%
COVID-19 related rebate(6) - (664 ) n/m n/m
Corporate financing and
restructuring costs(7) - 16,322 n/m n/m
Out of period operating lease
liability adjustment(8) (5,439 ) - n/m n/m
Employment related settlement
expense(9) 913 - n/m n/m
Adjusted EBITDA $ 60,741 $ (23,969 ) n/m n/m
(1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
(2)
See "Comparison of the fiscal year ended January 2, 2022 and January 3, 2021 - Other Expenses" for information regarding the increase in foreign exchange and share-based compensation expense period-on-period.
(3)
For fiscal year ended January 1, 2023 this excludes a $5 million non-cash
expense, which is included within Share-based compensation expense in the
Consolidated Statements of Operations, separately presented within Operational
reorganization and severance expense below. It also includes an expense of $3
million, which is excluded from Share-based compensation expense in the
Consolidated Statements of Operations, in respect of a non-recurring cash
payment in connection with the Growth Shares.
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(4)
Represents $4 million of expenses incurred with respect to a strategic reorganization program of the Company's operations and support teams. This also includes a non-cash share-based compensation expense of $5 million. The non-cash share-based compensation expense is reported within Share-based compensation expense.
(5)
Beginning on March 14, 2020, due to the COVID-19 pandemic, we issued membership credits to active members of our closed Houses to be redeemed for certain Soho Home products and services. Membership credits were a one-time goodwill gesture, issued as a marketing offer to active members. The expense represents our best estimate of the cost in fulfilling the membership credits.
(6)
Represent items of additional expense incurred in order to comply with health and safety protocols while keeping certain Houses open during the pandemic. In 2021, we received a government grant related to business rates in the UK which reduced our COVID related expenses.
(7)
Our Corporate financing and restructuring costs vary significantly each year and period presented based on financing and restructuring being undertaken. Such costs do not relate to normal, recurring, cash operating expenses. In fiscal 2021, these costs consisted of refinancing fees incurred of $2,534 and a portion of IPO-related costs of $13,788 which were not eligible to be recognized directly in equity.
(8th)
Represents an out-of-period adjustment correcting an error with respect to the estimation of the operating lease liability identified during fiscal 2022 but relating to fiscal years 2021, 2020 and 2019. There is no material impact from the correction of this error to previously reported periods. Refer to Note 2, Summary of Significant Accounting Policies-Basis of Presentation for further information.
(9)
Represents expenses incurred in connection with a historic settlement of an employment law claim. The company corrected its operations to prevent a similar problem from reoccurring.
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The computation of House-Level Contribution and Other Contribution is set forth
below:
For the Fiscal Year Ended
January 2,
2022 Constant
January 1, January 2, Constant Currency
2023 2022 Change % Currency(1) Change %(1)
Actuals
(Unaudited, dollar amounts in thousands)
Operating loss $ (147,481 ) $ (188,026 ) 22 % $ (167,282 ) 12 %
General and administrative 123,435 89,383 38 % 79,522 55 %
Pre-opening expenses 14,081 21,294 (34 )% 18,945 (26 )%
Depreciation and amortization 99,930 83,613 20 % 74,389 34 %
Share-based compensation 27,681 26,660 4 % 23,719 17 %
Foreign exchange loss, net 69,600 25,541 n/m 22,723 n/m
Other 9,703 26,097 (63 )% 23,218 (58 )%
Non-House membership revenues (30,057 ) (15,431 ) (95 )% (13,729 ) n/m
Other revenues (272,803 ) (153,431 ) (78 )% (136,505 ) (100 )%
Other operating expenses 250,336 167,152 50 % 148,712 68 %
House level contribution $144,425 $82,852
74 % $ 73,712 96 %
Operating loss margin (15 )% (34 )% (34 )%
House-Level Contribution Margin 22 % 21 % 21 %
For the Fiscal Year Ended
January 2,
2022
January 1, January 2, Constant Constant Currency
2023 2022 Change % Currency(1) Change %(1)
Actuals
(Unaudited, dollar amounts in thousands)
Membership revenues $ 272,809 $ 189,189 44 % $ 168,318 62 %
Less: Non-House membership
revenues (30,057 ) (15,431 ) (95 )% (13,729 ) n/m
Add: In-House revenues 426,602 217,934 96 % 193,892 n/m
Total House revenues 669,354 391,692 71 % 348,481 92 %
Less: In-House operating
expenses 524,929 308,840 70 % 274,769 91 %
House-Level Contribution $ 144,425 $ 82,852 74 % $ 73,712 96 %
For the Fiscal Year Ended
January 2,
2022 Constant
January 1, January 2, Constant Currency
2023 2022 Change % Currency(1) Change %(1)
Actuals
(Unaudited, dollar amounts in thousands)
Operating loss $ (147,481 ) $ (188,026 ) 22 % $ (167,282 ) 12 %
General and administrative 123,435 89,383 38 % 79,522 55 %
Pre-opening expenses 14,081 21,294 (34 )% 18,945 (26 )%
Depreciation and amortization 99,930 83,613 20 % 74,389 34 %
Share-based compensation 27,681 26,660 4 % 23,719 17 %
Foreign exchange loss, net 69,600 25,541 n/m 22,723 n/m
Other 9,703 26,097 (63 )% 23,218 (58 )%
House membership revenues (242,752 ) (173,758 ) (40 )% (154,589 ) (57 )%
In-House revenues (426,602 ) (217,934 ) (96 )% (193,892 ) n/m
In-House operating expenses 524,929 308,840 70 % 274,769 91 %
Total Other Contribution $ 52,524 $ 1,710 n/m $ 1,522 n/m
Operating loss margin (15 )% (34 )% (34 )%
Other Contribution Margin 17 % 1 % 1 %
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For the Fiscal Year Ended
January 2,
2022 Constant
January 1, January 2, Constant Currency
2023 2022 Change % Currency(1) Change %(1)
Actuals
(Unaudited, dollar amounts in thousands)
Other Contribution
Non-House membership revenues $ 30,057 $ 15,431 95 % $ 13,729 n/m
Add: other revenues 272,803 153,431 78 % 136,505 100 %
Less: other operating expenses 250,336 167,152 50 % 148,712 68 %
Other Contribution $ 52,524 $ 1,710 n/m $ 1,522 n/m
(1)
For a discussion of our results at constant exchange rates, see Non-GAAP Financial Measures – Constant Currency.
LIQUIDITY AND CAPITAL RESOURCES Liquidity is the ability to generate sufficient cash flows to meet the cash requirements of our business operations. Our principal sources of liquidity are operating cash flows, holdings of cash and cash equivalents and availability under our Revolving Credit Facility. As of January 1, 2023, we maintained a cash and cash equivalents balance of $182 million and a restricted cash balance of $8 million. Our primary requirements for liquidity are to fund our working capital needs, operating and finance lease obligations, capital expenditures and general corporate needs. Our ongoing capital expenditures are principally related to opening new Houses, refurbishing and maintaining the existing House portfolio as well as investments in our corporate technology infrastructure to support our digital strategy and technology infrastructure.
In a given year, our primary cash inflows and outflows relate to:
•
From ongoing operations, our cash inflows include membership income, internal income and other income such as: B. Selling retail products. The main cash outflows from operating activities include general operating expenses and interest payments.
•
from investing activities, our cash inflows include the proceeds from sale of property and equipment and the sales of subsidiaries. The primary cash outflows from investing activities include the purchase of property and equipment as well as intangibles.
•
from financing activities, our cash inflows from financing activities include proceeds from borrowings and from the issuance of shares. The primary cash outflows from financing activities include repayments of borrowings and legal and professional fees from debt or equity related transactions.
We believe that our existing cash and marketable securities holdings will be sufficient to fund our operating and finance lease obligations, capital expenditures and working capital needs for at least the next 12 months and for the foreseeable future, considering the repayment terms of our Miami real estate debt.
note the purchase agreement
On March 31, 2021, Soho House Bond Limited, a wholly-owned subsidiary of Soho
House Holdings Limited, issued pursuant to a Notes Purchase Agreement an
aggregate of $441 million in senior secured notes (the 'Initial Notes'), which
were subscribed for by certain funds managed, sponsored or advised by Goldman
Sachs & Co. LLC and its affiliates. The Initial Notes mature on March 31, 2027
and bear interest at a fixed rate equal to a cash margin of 2.0192% per annum
plus a payment-in-kind (capitalized) margin of 6.1572% per annum.
The terms of the Senior Secured Notes Facility include an option to issue, and a
commitment on the part of the purchasers to subscribe for, further notes in one
or several issuances on or prior to March 31, 2022 in an aggregate amount of up
to $100 million. This option was exercised on March 9, 2022 (the "Additional
Notes" and, together with the Initial Notes, the "Senior Secured Notes"). The
Additional Notes bear interest at a fixed rate equal to a cash margin of 2.125%
plus a payment-in-kind (capitalized) margin of 6.375%. As of January 1, 2023,
the outstanding balance on the Senior Secured Notes Facility is $571 million.
For further information, refer to Item 8, Financial Statements and Supplementary
Data, Note 12 Debt in this Annual Report on Form 10-K.
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Revolving Credit Facility
SHG Acquisition (UK) Limited and Soho House U.S. Corp., two of our wholly-owned
indirect subsidiaries, entered into a senior revolving facility agreement with
HSBC UK Bank PLC ('HSBC') on December 5, 2019 (the 'Revolving Credit Facility').
The initial size of the Revolving Credit Facility was £55 million ($72 million).
The Revolving Credit Facility was extended on May 7, 2020 in order to access an
additional facility of £20 million ($25 million), bringing the borrowing
capacity up to an aggregate of £75 million ($99 million). As of January 1, 2023,
£71 million ($96 million) is available to draw, subject to meeting covenant
requirements, with £4 million ($6 million) utilized as a letter of guarantee in
respect of one of our lease agreements.
On November 15, 2021 the First Amended and Restated Revolving Facility Agreement
(the "First Amendment") was signed which changed the reference rate under the
Revolving Credit Facility from a LIBOR-based rate to a SONIA-based rate and to
transition financial reporting requirements from accounting principles generally
accepted in the United Kingdom to accounting principles generally accepted in
the United States of America. The First Amendment also reset the Company's
Consolidated EBITDA test levels, scaling up from zero at December 31, 2021 to
£32.0 million ($44 million, if translated using the average exchange rate in
effect during the fiscal year ended January 2, 2022) after June 30, 2022.
On February 11, 2022, Soho House Bond Limited, a wholly-owned subsidiary of the
Company entered into the Second Amended and Restated Revolving Facility
Agreement (the "Third Amendment"), which amends and restates the Revolving
Credit Facility. The Third Amendment amends the Revolving Credit Facility to
extend the maturity date from January 25, 2023 to January 25, 2024.
On November 10, 2022, Soho House Bond Limited, a wholly-owned subsidiary of the
Company entered into the Third Amended and Restated Revolving Facility Agreement
(the "Third Amendment"), which amends and restates the Revolving Credit
Facility. The Third Amendment amends the Revolving Credit Facility to extend the
maturity date from January 25, 2024 to July 25, 2026. In addition the Third
Amendment provides that from March 2023 we are required to maintain certain
leverage covenants (as defined in the Revolving Credit Facility) which are only
applicable when 40% or more of the facility is drawn.
Loans under the Revolving Credit Facility are capable of being borrowed, repaid
and reborrowed at any time. For further information, refer to Item 8, Financial
Statements and Supplementary Data, Note 12 Debt in this Annual Report on Form
10-K.
CASH FLOW AND WORKING CAPITAL
The following table provides a summary of cash flow data for the periods
presented:
For the Fiscal Year Ended
January 1, January 2,
2023 2022
(Unaudited, dollar amounts in thousands)
Net cash generated by (used in)
Net cash provided by (used in) operating activities $ 14,682 $ (127,419 )
Net cash used in investing activities (94,137 ) (119,139 )
Net cash provided by financing activities 52,835 408,160
Effect of exchange rates on cash and cash equivalents (3,999 ) (910 )
Net (decrease) increase in cash and cash equivalents $(30,619)
$ 160,692
NET FUNDS SUPPLIED (USED THEREIN) BY BUSINESS
The primary cash inflows from operating activities include Membership Revenues, In-House Revenues and Other Revenues, such as the sale of retail products. The primary cash outflows from operating activities include general operating expenses and interest payments. For fiscal 2022, Net cash by operating activities was $14,682 compared to Net cash used in operating activities of $127,419 in fiscal 2021. The increase in cash provided by operating activities of $142,101 was primarily due by improving trading conditions as a result of the lessening of COVID-19 pandemic restrictions which has a significant impact of fiscal 2021 resulting in a year on year decrease in Net loss of 22% as well as the non-cash impact of foreign exchange losses which is offsetting some of the improvement in trading conditions.
NET FUNDS USED IN INVESTING ACTIVITIES
The primary cash inflows from investing activities include the cash acquired as
a result of acquisitions. The primary cash outflows from investing activities
include the purchase of property and equipment, intangibles and the acquisition
of noncontrolling interests.
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For fiscal 2022, Net cash used by investing activities was $94,137 compared to
Net cash used in investing activities of $119,139 in fiscal 2021. The decrease
in net cash used of $25,002 was primarily due to $17,083 less cash used in the
purchase of property and equipment. In fiscal 2022, in line with our asset-light
strategy as described in Item 1 Business in this Annual Report on Form 10-K, we
have reduced the number of projects requiring substantial capital expenditure.
NET FUNDS ALLOWED FROM FINANCING ACTIVITIES
The main cash inflows from financing activities include cash inflows from taking out loans and from the issue of shares. The primary cash outflows from financing activities include principal payments on loans and payments to settle redeemable preferred stock.
For fiscal 2022, Net cash provided by financing activities was $52,835 compared to Net cash provided by financing activities of $408,160 in fiscal 2021. The decrease in cash generated of $355,325 as compared to fiscal 2021 was primarily due to net proceeds from the initial public offering of $387,538, proceeds from borrowings mainly from the Note Purchase Agreement of $465,948 and the Senior convertible preference shares issued, net of issuance costs, of $161,574 generated in fiscal 2021. The cash generated in fiscal 2021 was reduced by the repayment of debt of $613,984 and the cash settled redemption of May 2016 preferred shares, which was required following initial public offering, of $19,899. The cash generated in fiscal 2022 is mainly due to the proceeds from borrowings, net of debt issuance costs of $1 million, of $99 million related to the Goldman Sachs Senior Secured Note Purchase Agreement decreased by the Company's purchase of treasury stock of $50 million. Refer to Item 8, Financial Statements and Supplementary Data, Note 12 Debt and Note 15 SHHL Redeemable Preferred Shares and Item 5, Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in this Annual Report on Form 10-K for further information.
CASH NEEDS FROM CONTRACTUAL AND OTHER OBLIGATIONS
Material contractual obligations arising in the normal course of business primarily consist of operating and finance lease obligations and long-term debt facilities. The timing and nature of these commitments are expected to have an impact on our liquidity and capital requirements in future periods. Refer to Note 6 Leases in this Annual Report on Form 10-K for additional information relating to our operating and financing leases and Item 8, Financial Statements and Supplementary Data, Note 12 Debt in this Annual Report on Form 10-K for additional information related to our long-term debt. Purchase obligations include all legally binding contracts, including commitments for the fitting out of real estate and software development/license commitments and service contracts. The majority of our purchase obligations are due within the next 12 months. Refer to Item 8, Financial Statements and Supplementary Data, Note 18 Commitments and Contingencies in this Annual Report on Form 10-K for additional information.
leases
As of January 1, 2023, we have entered into 17 operating lease agreements for
Houses, hotels, restaurants, and other properties which have not commenced. We
will determine the classification as of the lease commencement date, but
currently expect these under construction leases to be operating leases. We
estimate the total undiscounted lease payments for these leases commencing in
fiscal years 2023, 2024, and 2025 to be $286 million, $866 million, and $320
million.
For fiscal years 2023 and 2024, our contractual lease payments from existing
lease agreements will total $139,676 and $143,527. Refer to Note 6 Leases in
this Annual Report on Form 10-K for additional information relating to our
operating and financing leases.
Except for operating leases entered into in the normal course of business where
we have not yet taken physical possession of the leased property, certain
letters of credit entered into as security under the terms of several of our
leases and the unrecorded contractual obligations set forth above, we did not
have any off-balance sheet arrangements as of January 2, 2022.
Soho Works Limited loan
In 2017, Soho Works Limited ("SWL") entered into a term loan facility agreement
for a £40 million term loan facility. The SWL loan bears interest at 7% and
matures on September 29, 2022. On March 3, 2023 this loan was extended and the
maturity date is now September 29, 2024 after having previously been extended to
September 29, 2023 by an amendment entered into on March 11, 2022.
Goldman Sachs Senior secured notes
On March 9, 2022, Soho House Bond Limited, a wholly-owned subsidiary of the
Company, exercised its option under the Goldman Sachs Senior Secured Note
Purchase Agreement to issue $100 million of additional notes. The net proceeds
drawn down were used, in
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part, to finance the $50 million share repurchase program (refer to note 17 Loss
Per Share and Shareholders' Equity (Deficit) in this Annual Report on Form 10-K
for additional information) with the remaining $50 million being used for
general corporate purposes.
Real Estate Mortgage Loan
In February 2019, the Company refinanced an existing term loan and mezzanine loan associated with a March 2014 corporate acquisition of Soho Beach House Miami with a new term loan and mezzanine loan. The new term loan of $55 million and mezzanine loan of $62 million are secured on the underlying property and operations of Soho Beach House Miami and are due in February 2024. The loans bear interest at 5.34% and 7.25%, respectively. The Company incurred interest expense on these facilities of $8 million, $8 million, and $8 million during the fiscal years ended January 1, 2023, January 2, 2022, and January 3, 2021, respectively.
CRITICAL ACCOUNTING PRINCIPLES AND SIGNIFICANT DISCRETIONS AND ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that can have a significant impact on the reported amounts of assets and liabilities, revenue and expenses and related disclosure of contingent assets and liabilities, at the respective dates of our financial statements. We base our estimates, assumptions and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We evaluate our estimates, assumptions and judgments on a regular basis and make changes accordingly. We also discuss our critical accounting estimates with our supervisory board. We believe the following to be critical accounting policies because they are important to the portrayal of our financial condition or results of operations and they require critical management estimates and judgments about matters that are uncertain: • Going Concern •
Impairment of goodwill and acquired intangible assets
•
Impairment of other long-lived assets
• Leases • Income taxes • Variable interest entities • Membership credits •
home improvement loans and
• Share-based compensation GOING CONCERN
The going concern basis of our consolidated financial statements, included elsewhere in this annual report, assumes that we will continue in business for at least a period of 12 months from the date of these financial statements and provides for the realization of assets and the satisfaction of liabilities in the ordinary course of business.
We have experienced net losses and significant cash outflows from cash used in
operating activities over the past years as we develop our Houses. During the
fiscal year ended January 1, 2023, the Company incurred a consolidated net loss
of $220 million. During the fiscal year ended January 1, 2023, the Company had
positive cash flow from operations of $15 million. As of January 1, 2023, the
Company had an accumulated deficit balance of $1,242 million. As of January 1,
2023, the Company had a cash and cash equivalents balance of $182 million, and a
restricted cash balance of $8 million.
In assessing the going concern basis of preparation of the consolidated
financial statements for the fiscal year ended January 1, 2023, we have taken
into consideration detailed cash flow forecasts for the Company, the Company's
forecast compliance with bank covenants, and the continued availability of
committed and accessible working capital to the Company.
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We have considered the current global economic and political uncertainties,
specifically including inflationary pressures on consumables purchased and
wages, as well as any further possible impacts from the COVID-19 pandemic and
the Company has factored these in when it undertook an assessment of the cash
flow forecasts covering a period of at least 12 months from the date these
financial statements are issued. Cash flow forecasts have been prepared based on
a range of scenarios including, but not
limited to, no further debt- noting that our property mortgage ($116 million)
expires in February 2024, or equity funding, macro-economic dynamics, possible
temporary closures of our properties from any further impact of the COVID-19
pandemic (which impacts the Company's ability to keep open Houses and maintain a
level of operations consistent with pre COVID-19 times), cost reductions, both
limited and extensive, and a combination of these different scenarios.
We believe that our projected cash flows and the actions available to management
to further control expenditure (particularly in respect of timing of capital
works and labor costs), as necessary, provide the Company with sufficient
working capital (including cash and cash equivalents) to achieve its plans of
continued recovery from the impact of the pandemic and mitigating the impacts of
inflationary pressures, return of a pandemic and consumer confidences, subject
to the following key factors:
•
the level of in-House sales activity (primarily sales of food and beverage) may be subject to operational restrictions or capacity constraints, connected with the re-emergence of COVID, which could impact members spending patterns;
•
the continued high level of member retention and renewals, along with members continuing their current spending patterns; And
•
the implementation and timely implementation of cost containment and reduction measures aligned with expected capacity levels.
Furthermore, available cash as a result of completed financing events, includes the exercising of an option on March 9, 2022 for issued additional notes under the existing senior secured notes for $100 million and available additional liquidity, and access to an undrawn revolving credit facility of £71 million ($96 million) (see Note 12, Debt, for additional information). This, together with the Company's wider sufficient financial resources, an established business model and the measures that have been put in place to control costs, mean that we believe that the Company is able to continue in operational existence, meet its liabilities as they fall due, operate within its existing facilities, and meet all of its covenant requirements for a period of at least 12 months from the date these financial statements are issued. Based on the above, the consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, we continue to adopt the going concern basis in preparing the consolidated financial statements for the fiscal year ended January 1, 2023.
IMPAIRMENT OF GOODWILL AND PURCHASED INTANGIBLE ASSETS
Our methodology for allocating the purchase price relating to purchase
acquisitions is determined through established valuation techniques. Goodwill
represents a residual value as of the acquisition date, which in most cases
results in measuring goodwill as an excess of the purchase consideration
transferred plus the fair value of any noncontrolling interest in the acquired
company over the fair value of net assets acquired, including contingent
consideration. Goodwill is tested for impairment at the reporting unit level
(operating segment or one level below an operating segment) on an annual basis
on the first day of the fourth fiscal quarter and between annual tests if an
event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying value. These events or
circumstances could include a significant change in the business climate, legal
factors, operating performance indicators, competition, or sale or disposition
of a significant portion of a reporting unit.
We make judgments about the recoverability of purchased intangible assets with
finite lives whenever events or changes in circumstances indicate that an
impairment may exist. Recoverability of purchased intangible assets with finite
lives is measured by comparing the carrying amount of the asset to the future
undiscounted cash flows the asset is expected to generate.
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In accordance with GAAP, we review indefinite-lived intangible assets for
impairment annually or whenever events or changes in circumstances indicate that
the asset might be impaired. We perform a qualitative assessment first to
determine whether it is necessary to perform a subsequent quantitative
impairment test. If the qualitative assessment determines that it is more likely
than not that the fair value of any reporting unit is less than its carrying
value, the quantitative impairment test is required to be performed; otherwise,
no further testing of impairment is required. Qualitative factors that we
consider include macroeconomic and industry conditions, our overall financial
performance, and other relevant entity-specific events. Alternatively, we can
choose to not first assess qualitative factors and instead perform the
quantitative impairment test only. When performing the quantitative goodwill
impairment test, the Company compares the estimated fair value of a reporting
unit with the respective carrying value. If the estimated fair value of a
reporting unit is less than its carrying amount, the excess of the carrying
value of the reporting unit over its fair value is recognized as a goodwill
impairment. When performing a quantitative goodwill impairment assessment, the
estimated fair value of a reporting unit is calculated using the income approach
and the market approach. For the income approach, the Company uses internally
developed discounted cash flow models that include the following assumptions,
among others: projections of revenues, expenses, and related cash flows based on
assumed long-term growth rates and demand trends; expected net working capital
and capital expenditure requirements; and estimated discount rates. For the
market approach, the Company relies upon valuation multiples derived from stock
prices and enterprise values of publicly-traded companies that are comparable to
the reporting unit being evaluated.
The goodwill balance recorded in the consolidated balance sheets as of January
1, 2023 and January 2, 2022 was $200 million and $214 million, respectively. In
response to changes in industry and market conditions, we could be required to
strategically realign our resources and consider restructuring, disposing of, or
otherwise exiting businesses, which could result in an impairment of goodwill or
other intangible assets.
The Company believes the estimated fair values of its reporting units exceed
their carrying values in fiscal 2022 and fiscal 2021. There was no impairment of
goodwill or purchased intangible assets in fiscal 2022, fiscal 2021 or fiscal
2020.
DEPRECIATION OF OTHER DURABLE ASSETS
We periodically evaluate long-lived assets held for use, which include property, plant and equipment, other intangible assets and equity method investments and assets held for sale whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. Assets are grouped and evaluated for impairment at the lowest level of which there are identifiable cash flows. Such assets are reviewed for impairment using factors including, but not limited to, our future operating plans and projected cash flows. The determination of whether impairment has occurred is based on an estimate of undiscounted future cash flows directly related to that asset or group of assets, compared to the carrying value of the assets. We recognize impairment if the sum of the undiscounted future cash flows does not exceed the carrying value of the assets. For impaired assets, we recognize a loss equal to the difference between the net book value of the asset and its estimated fair value. Fair value is based on discounted future cash flows of the asset using a discount rate commensurate with the risk. In addition, at the time a decision is made to sell or discontinue use of an asset or group of assets, we record an impairment charge, if appropriate, or accelerate depreciation over the revised useful life of the asset. There was no material impairment recognized in fiscal 2022, fiscal 2021 or fiscal 2020. LEASES
We have leases for our homes, hotels, restaurants, spas and other properties. We account for our leases in accordance with Accounting Standards Update (“ASU”) 2016-02, Leases (Item 842).
We determine the initial classification and measurement of our right-of-use assets and lease liabilities at the lease commencement date and thereafter if modified. The determination of operating and finance leases requires significant judgments, including estimation of the rate implicit in the lease, incremental borrowing rates and reasonably assured lease terms. The lease term includes any renewal options and termination options that we are reasonably assured to exercise. The present value of lease payments is determined by using the interest rate implicit in the lease for finance leases and the incremental borrowing rate for operating leases. The incremental borrowing rate is determined by using a portfolio approach based on the rate of interest that we would pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment. We recognized operating lease assets of $1,086 million and $997 million and operating lease liabilities of $1,249 million and $1,152 million at January 1, 2023 and January 2, 2022, respectively.
INCOME TAX
We are subject to income taxes in the United States and numerous foreign
jurisdictions. Our effective tax rates differ from the statutory rates,
primarily due to the foreign tax rate differential, tax exempt revenue and non-
deductible expenses and as further described in the notes to our consolidated
financial statements included in this Form 10-K. Our effective tax rate was
(2)%, (0)% and
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0% in fiscal 2022, fiscal 2021 and fiscal 2020, respectively. In FY 2022 we
incurred an expense to our consolidated statement of operations, of $5 million,
an expense for fiscal 2021 of less than $1 million, and a benefit for fiscal
2020 of less than $1 million.
Significant judgment is required in evaluating our uncertain tax positions and
determining our provision for income taxes. Although we believe our reserves are
reasonable, no assurance can be given that the final tax outcome of these
matters will not be different from that which is reflected in our historical
income tax provisions and accruals. We adjust these reserves in light of
changing facts and circumstances, such as the closing of a tax audit or the
refinement of an estimate. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences will impact the
provision for income taxes in the period in which such determination is made.
The provision for income taxes includes the impact of reserve provisions and
changes to reserves that are considered appropriate, as well as the related net
interest.
Significant judgment is also required in determining any valuation allowance
recorded against deferred tax assets. In assessing the need for a valuation
allowance, we consider all available evidence, including past operating results,
estimates of future taxable income, reversal patterns of taxable and deductible
temporary differences and the feasibility of tax planning strategies. In the
event that we change our determination as to the amount of deferred tax assets
that can be realized, we will adjust our valuation allowance with a
corresponding impact to the provision for income taxes in the period in which
such determination is made.
Our provision for income taxes is subject to volatility and could be adversely
impacted by earnings being lower than anticipated in countries that have lower
tax rates and higher than anticipated in countries that have higher tax rates;
by changes in the valuation of our deferred tax assets and liabilities; by tax
effects of non-deductible compensation; by tax costs related to intercompany
realignments; by changes in accounting principles; or by changes in tax laws and
regulations.
VARIABLE INTEREST ENTITIES
We analyze our variable interests, including loans, guarantees, and equity
investments, to determine if the entity in which we has a variable interest is a
VIE. For those entities determined to be VIEs a quantitative and qualitative
analysis is performed to determine if we will be deemed the primary beneficiary.
The primary beneficiary of a VIE is defined as the variable interest holder that
has a controlling financial interest in the VIE.
A controlling financial interest is defined as one that has (i) the power to
direct the activities of the VIE that most significantly impact its economic
performance and (ii) the obligation to absorb losses of the entity or the right
to receive benefits from the entity that could potentially be significant to the
VIE.
In evaluating whether we have the power to direct the activities of a VIE that
most significantly impact its economic performance, we base our qualitative
analysis on our review of the design of the entity, its organizational structure
including decision-making ability and the relevant development, ownership
interest, operating, management and financial agreements. This evaluation
requires consideration of all facts and circumstances relevant to
decision-making that affect the entity's future performance and the exercise of
professional judgment in deciding which decision-making rights are most
important.
We consolidate those companies where we are identified as the primary beneficiaries. When we are not identified as the primary beneficiary but can exercise significant influence over those entities, those interests are accounted for using the equity method.
MEMBER CREDITS
As a result of government imposed measures intended to control the spread of
COVID-19, including quarantines, restrictions on travel and restrictions on
certain business operations, we temporarily closed many of our Houses. We issued
membership credits to active members of such closed Houses to be redeemed for
certain Soho Home products, food and beverage in our Houses and our public
restaurants and other eligible services. Membership credits were a one-time
goodwill gesture, issued as a marketing offer to active members. As such, the
issuance of the membership credits provided is deemed to have no material right
or separate performance obligation, and no contractual arrangement has been
entered into. We recognize a liability in respect of the outstanding membership
credits based on our best estimate of the cost to be incurred in fulfilling the
membership credits, which are expected to be redeemed by our active members. In
estimating the cost of fulfillment, we regularly review the purchase cost price
of items that membership credits are redeemed against. This is principally food
and beverage in our Houses which is a significant component of the purchase cost
percentage applied to the face value of the membership credits issued. We then
apply an expected redemption rate percentage to this which is based on
historical redemption patterns by our members. These two calculations yield our
accrued liability for membership credits. The liability associated with the
membership credits is derecognized based on the usage of credits by members
during the period incurred. The redemption rate applied when estimating the
liability is based on historical redemption patterns of comparable offerings and
is subject to uncertainty. We regularly evaluate current information available
to us to determine whether the redemption
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rate should be adjusted based on our cumulative redemption experience and
changes to other factors including any changes to expiration dates based on our
re-opening plans for our Houses as well as our actual experience of the cost of
fulfillment. Estimating the expected redemption rate by our members and, to a
lesser extent, the cost of fulfillment involves significant judgment. The
membership credits expired on September 30, 2021.
HOUSE INTRODUCING CREDITS
New members admitted on or after April 4, 2022 are required to purchase House
Introduction Credits ("House Introduction Credits") as part of their membership,
per the House rules. House Introduction Credits are credits of an equivalent
value to cash within Houses and are redeemable against purchases of food and
beverage items and bedroom stays at the Houses. House Introduction Credits
expire after three months from the date of issuance, where legally permitted in
the regions we operate, if not utilized or if the Company terminates a member's
House membership. House Introduction Credits are recognized upon issuance as
deferred revenue on our consolidated balance sheets. Revenue from House
Introduction Credits are recognized as In-House revenues when redeemed by
members, and as breakage revenue within Membership revenues upon expiration or
in the period when we are able to reliably estimate expected breakage, to the
extent that they are unredeemed, and further redemption is deemed remote.
SHARE-BASED COMPENSATION
In August 2020, the Company established the 2020 Equity and Incentive Plan (the
"2020 Plan") under which SHHL Share Appreciation Rights ("SARs") and SHHL Growth
Shares were issued to certain employees. In connection with the IPO in July
2021, 25% of the outstanding awards accelerated in accordance with the original
plan and all of the outstanding awards were exchanged into awards that will be
settled in Class A Common Stock of MCG. The exchanged awards are subject to the
same vesting conditions as the original awards. The Company treated the exchange
as a Type I probable-to-probable modification.
In July 2021, the Company established its 2021 Equity and Incentive Plan (the
"2021 Plan"). The 2021 Plan allows for grants of nonqualified stock options,
SARs, and RSUs, or performance awards. There were 12,107,333 shares initially
available for all awards under the 2021 Plan and the shares available may,
subject to board approval, increase annually on the first day of each calendar
year, beginning with the calendar year ending December 31, 2022.
Share-based compensation expense is measured based on the grant-date fair value
of those awards. All the Company awards in issue have graded-vesting features
and are service conditions only awards and therefore compensation expense is
recognized on a straight-line basis over the total requisite service period for
the entire award.
For the Company's SAR and Growth Share awards, the grant-date fair value of the
awards is determined using the Black-Scholes option pricing model and involves
several assumptions, including the expected term of the option, expected
volatility and risk-free interest rate. We have limited historical data of our
own to utilize in determining our assumptions, as there has only been a public
market for our shares following the IPO in July 2021. As such, for SAR and
Growth Share awards granted and/ or modified in fiscal 2022, 2021 and 2020, we
based our volatility assumption on that of a selected peer group. Forfeitures
are recognized as they occur for all equity awards.
In December 2022, the Company changed the exercise prices on certain outstanding SARs to $4.00 per share. As a result, the entity accounted for the change as a Type I change, resulting in an additional $2.2 million in fair value, of which $1.5 million was recognized immediately.
Recently issued accounting pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Item 8, Financial Statements and Supplementary Data, Note 2 Summary of Significant Accounting Policies - Basis of Presentation to our consolidated financial statements appearing in Item 8 and elsewhere in this Annual Report on Form 10-K.
Status of an aspiring growth company
We are an 'emerging growth company,' as defined in the Jumpstart Our Business
Startups Act of 2012, (the "JOBS Act"), and are eligible to take advantage of
certain exemptions from various reporting requirements that are applicable to
other public companies that are not 'emerging growth companies,' including, but
not limited to: presenting only two years of audited financial statements in
addition to any required unaudited interim financial statements with
correspondingly reduced "Management's Discussion and Analysis of Financial
Condition and Results of Operations" not being required to comply with the
auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of
2002, or Sarbanes-Oxley; having reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy or information
statements; being exempt from the requirements to hold a non-binding advisory
vote on executive compensation or seek stockholder approval of any golden
parachute payments not previously approved;
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and not required to adopt specific accounting standards unless those standards would otherwise apply to private companies. As a result, our financial statements may not be comparable to those of companies that comply with the new or revised accounting standards at the effective date of public companies.
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