Q2 2021 Carrols Restaurant Group Inc Earnings Call
[music].
Good morning, welcome to Karl's Restaurant Group, Inc. Second quarter 'twenty 'twenty, one earnings conference call.
At this time all participants are in a listen only mode.
Following the presentation, we will conduct a question and answer session and instructions will be given at that time.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad I would like to remind everyone that this conference call is being recorded today Thursday August 12, 2021 at 830, a M eastern time and will be available for replay.
I will now turn the conference over to Tony Hall, Chief Financial Officer. Please go ahead Sir.
Thank you, Doug and good morning, everyone.
By now you should have access to our earnings announcement released earlier this morning, and an earnings presentation that are both available on our website at www Dot Carol's dot com under the Investor Relations section.
Before we begin our remarks.
I would like to remind everyone that our discussion will include forward looking statements, which may consist of comments regarding our strategies intentions or plans. These.
These statements are not guarantees of future performance and therefore undue reliance should not be placed on them.
We also reviewed refer you to our filings with the SEC for more details both with respect to forward looking statements as well as risks that could impact our business results, including among other things the impact of Covid 19.
During today's call, we will discuss certain non-GAAP measures that we believe can be useful in evaluating our performance.
The presentation of this additional information should not be considered in isolation or as a substitute results prepared in accordance with generally accepted accounting principles.
A reconciliation to comparable GAAP measures is available with our earnings release with that I will now turn the call over to our chairman and CEO, Dan Academia Dan.
Thanks, Tony and good morning, everyone.
I'd like to begin with some color on our recent performance before discussing the special cash dividend, we announced earlier today.
The words, Tony will review, our quarterly financials and outlook in greater detail.
Beginning with our top line comparable sales rose 12, 6% during the second quarter at our Burger King restaurants, which was driven mostly by the 31, 5% increase in April.
Recall that in May 2020 comps declined only slightly while in June of 2020 comp sales already turned positive as a result, our sequential trend of comp sales growth slowed through the three month period. This year, but we're still positive throughout the second quarter.
Importantly, relative to 2019, our quarterly comparable Burger King restaurants sales increased seven 8%, despite only serving approximately 89% of the traffic in the second quarter of 2019.
We once again outpaced the overall U S. Burger King system as we have done for 20 out of the past 22 quarters, using a calendar basis, rather than the physical period basis, we used to report our second quarter 'twenty 'twenty, one comparable Burger King restaurants sales increased 14, 2% compared to $13.
Scent for the entire U S Burger King system, reflecting a positive differential of 120 basis points.
In July 2021 comparable sales at our Burger King restaurants increased one 8% compared to July 2020, and improved four 4% compared to two night 2019 on a same store basis.
Turning to the promotional calendar Burger King emphasized several new product and value offerings. During the second quarter, most notably among these was the hand breaded chicken sandwich, which was promoted with extensive national advertising beginning in June okay.
The campaign established tremendous awareness for Burger King's New Chicken Sandwich, which we believe is best in class and we doubled our crispy chicken sandwich sales per store from a value standpoint, Burger King's focus was on the buy one get one plus a dollar offer as an alternative to the two for five platform.
Interestingly and perhaps not surprisingly the new chicken sandwiches fared better within our northeast and Midwest regions, but they also have not been as strong in the south central and southeast we believe that the concentration of chicken based Q I saw our restaurants based in the south.
With numerous chicken sandwich introductions across the industry by our peers is weighed more heavily on its reception in these regions.
We are encouraged by the rollout of Burger King's Royal Perks loyalty program, which is geared towards increasing the level of one on one engagement Burger King has with its customers, reducing the use of paper coupons in driving traffic to week or day parts. This platform provides the brand with valuable data and insights.
And members of these types of programs typically show higher spending frequency as compared to nine members.
So far in 'twenty and 'twenty, one mobile orders accounted for about 1% of our sales. We are confident Burger King's New loyalty program will accelerate the growth of this distribution channel and drive increased traffic by improving customer engagement.
During the second quarter all of our dining rooms were open and they remain so today. Despite the emergence of the Delta variant dining room usage increased during the quarter at our Burger King restaurants were eat in and takeout combined were tracking at about 14% of total sales by June and drive through was down to approximately 80% of total sales.
Compared to the mid eighties during most of our Covid impacted months.
Last year during Q2, only about 20% of our dining rooms were open.
On a related note delivery comprised four 7% of our total Burger King restaurants sales during Q2 up from two 8% in Q2 last year and flat with four 8% in Q1 of 2021 the.
The average check size rose sequentially to $17.56 from $17.51 per delivery. The overall second quarter average check for Burger King was $9, one including delivery.
Integrated delivery services are available at about 90% of our Burger King restaurants in most of our popeye's locations.
Current $20 million quarterly run rate review this convenience option as an ongoing sales contributor even when the pandemic subsides.
Turning now to profitability adjusted restaurant level EBITDA declined by 11, 6% compared to the same period in 2020 as margins decreased by 340 basis points to 11, 3% of restaurant sales the magnitude of the margin compression we experienced in the second quarter was driven by two main factors.
First our objective to increase the operating hours of our stores to take advantage of the strengthening post covid economy in the face of severe labor constraints and second spike in food and labor input cost is the entire economy opened at the same time.
Food beverage and packaging costs as a percent of net sales increased primarily because of higher pork and other commodity costs, along with the incremental impact related to higher delivery activity. Although these increases were partially offset by menu price actions, we instituted in March of 2021 labor.
Labor cost as a percent of net sales also rose sharply due to the contrast between the beneficial labor environment that was in place in the second quarter of 2020 during the early stages of the pandemic and the incredibly tight labor market experienced during the second quarter of 2021 during the reopening phase of the pandemic.
I can tell you that the velocity and magnitude of the change was greater than anticipated.
As the second quarter unfolded.
The most significant unexpected headwind with a nearly 12% increase in average hourly wages for our team members, including overtime. This cost us approximately $3 million more than we had planned and was driven by competitive pressures as well as difficulty filling positions during operating hours. The other major labor headwind came from our inability to stay.
GAAP, our restaurants properly with managers at the beginning and end of each day, we were required to pay a premium to team members to open and close restaurants, and that's also cost us about $3 million in the second quarter of 2021. We also provided standard overtime hours to assistant managers that we're restricted in the year ago period.
Our team size for Burger King restaurant averaged 21 employees during the second quarter of 2021, which was similar to the first quarter, but higher than the 19, we averaged in the second quarter of last year as a consequence of the expansion of operating hours. However, these employees are having to work more hours per week in la.
July we increased menu pricing by another 2% from plant to do the same in October as well as implement other menu price increases that we may deem necessary as the year progresses.
You may recall that we had intended to hold pricing at about 2% for the entire year, but given the challenges we are seeing with respect to our restaurant level input costs, we intend to use the flexibility we have to take additional pricing in the midst of this more elastic economic environment, we expect that the incremental benefit to our bottom line from these pricing actions should help us.
Largely offset the current high cost environment.
Turning to our restaurant portfolio, we acquired 19 Burger King restaurants late in the second quarter in two separate transactions. These restaurants are located in Indiana, and Michigan to mid Western States, where we already have a significant presence. We believe that we can improve upon the average sales volume of these restaurants and increased their margins over time as we integrate them.
Into our existing operations.
Currently have no additional multi restaurant acquisitions in the pipeline given the high multiples, we are seeing beef being paid for <unk> acquisitions in the private market.
In the past year, we have not only increased our available liquidity to over $175 million, but also reduced our total net leverage to three eight times from 4.18 times a year ago.
We believe our liquidity is ample as does our ability to generate consistent earnings. Consequently, we expect to be able to continue to invest in strong return producing organic growth through remodeling, our existing restaurant portfolio and building new restaurants, as well as acquiring restaurants in both brands when they can be purchased at reasonable multiples.
Given this backdrop as well as confidence in the outlook for our business. Our board of directors concluded that the company should move ahead with plans to return capital to our stockholders in order to further enhance shareholder value, while keeping our leverage in check at under four times over the cycle.
As highlighted in our earnings release. This morning, our board of Directors approved a special cash dividend of 41 cents per share, which will be paid October 5th 2021 to stockholders of record as of August 25.2021.
$25 million special cash dividend marks the first dividend, we have paid nearly 15 years as a public company.
So to conclude we are facing our cost challenges head on with more aggressive pricing, which we believe will stabilize margins in the back half of the year and positively impact overall EBITDA levels. Our franchise or is also working with us and other burger king franchisees to optimize value menu items in order to relieve margin headwinds.
At the same time the flexibility we now have with respect to our balance sheet is enabling us to tangibly demonstrate our commitment to using resources at our disposal to enhance value for our stockholders with that let me turn the call over to Tony to review our quarterly financials.
Thank you Dan.
Total restaurant sales for the second quarter increased 15, 2% to $424.5 million compared to the prior year period at $368.4 million.
Our Burger King comparable restaurant sales increased 12, 6% during the quarter with average weekly sales for Burger King restaurants, a $30700. This is an improvement of 14, 7% from 2020 levels and more importantly, exceed the 2019 levels by seven 8%.
Increased contributions from new and post Covid reopened restaurants is the primary reason for the difference between comparable and total sales growth in the quarter.
Let me quickly give you our Burger King performance by region as we operated nearly.
30 restaurants has the end of the Q2 across 23 states.
In the northeast, representing 21% of our Burger King restaurants comparable sales were up 19, 7%.
In the Midwest, representing 29% of our Burger King restaurants comparable sales were up 12, 4%.
In the south central representing 24% of our Burger King restaurants, and consisting mainly of Tennessee comparable sales increased 10, 6% and finally in our southeast region, representing 26% of our Burger King restaurants comparable sales were up six 6%.
With respect to our popeye's restaurants comparable restaurant sales decreased five 3% versus a positive 17, 1% during the same period last year.
While the brand experienced some pressure from competitors launch new chicken sandwiches themselves are results are favorable over the two year period and the majority of the growth is related to the continued strength of the brands chicken sandwich.
<unk> restaurants represents five 2% of our second quarter revenue.
As a result of the inflation challenges experienced in the second quarter, adjusted EBITDA decreased $8.7 million to $29.3 million, while adjusted EBITDA margins decreased 340 basis points to six 9% of restaurant sales.
Food beverage and packaging costs as a percentage of net sales increased 140 basis points, primarily because of higher pork and other commodity costs.
Beef prices averaged $2.35 per pound during the second quarter, which was only a 50 basis point increase from the same period, a year ago when ground beef prices were at $2.34 per pound.
Last quarter, we stated that our food supplier forecast in beef costs would be elevated during the summer months, but returned to roughly $2.30 per pound for the remainder of 2021. They have revised their forecast to between $2.42.45. A pound from September to December of 2021. They believe the same easing trajectory is likely to occur over there.
Remainder of 2021 for all other commodities, including chicken. The one exception to this is pork, which they believe will remain elevated for the rest of 2021.
Restaurant Labor expense increased 200 basis points as a percent of restaurant sales in the second quarter of 2021 compared to the prior year quarter again, the dramatic contrast between the restrained operating environment, we experienced in the second quarter of 2020 and the economy reopening during the second quarter 2021 is something that we believe is unprecedented and certainly it was not.
Anticipated.
It is worth noting that labor cost as a percent of net restaurant sales, which reached 32, 4% in the second quarter of 2021 were lower by 70 basis points compared to that margin during the second quarter of 2019 in fact adjusted EBITDA in the second quarter of 2021 was $5.2 million greater than the amount we earned in the second quarter of 2019.
Gene this is relevant as it compares this year's results to where we were prior to the onset of any pandemic related volatility that has impacted us over the past 18 months.
Restaurant rent expense in the second quarter decreased 70 basis points as a percent of sales compared to the prior year period, primarily due to sales leverage.
Other restaurant operating expenses increased 60 basis points as a percent of sales compared to the prior year period, due to higher repair and maintenance security and equipment rental costs compared to the prior.
Two a period of restricted operating experience in the prior year.
General and administrative expenses rose to $27 million in the second quarter of 2021 from $18.6 million in the prior year, but fell 10 basis points as a percent of restaurant sales. The increase in dollar terms was due to the lapping against training costs short term pay and travel reductions experienced in 2020 and a half.
Higher stock compensation expense this year.
Our net loss was $9.6 million in the second quarter of 2021 or <unk> 19 per diluted share. This loss includes $8.5 million.
The noncash charge related to the write off of original issue discount and other debt issuance cost that we're paying and capitalized in earlier periods on an adjusted basis, excluding certain non operating items second quarter. Adjusted net income was $16000 or zero cents per diluted share.
In the prior period adjusted net income was $9.6 million or 16 cents per diluted share.
Free cash flow for the second quarter of 2021 was $4.2 million compared to $48.6 million in the prior year period recall that in the second quarter of 2020, we reduced capital expenditures and took aggressive actions to shore cash by managing working capital and comparing the two quarters. These two items account for about 30.
The reduction in free cash flow generation. The rest of the difference is primarily due to eight point the $8.7 million reduction in adjusted EBITDA.
We ended the second quarter with cash and cash equivalents of $56.2 million in long term debt and finance lease liabilities of $521.5 million, we had $46 million drawn on our $175 million revolving credit facility and had $9 million of letters of credits issued under such facility. This left 120.
Unused availability.
Facility and when added to our cash cash.
Balanced provided us with $176.2 million of liquidity at the end of Q2.
Our net debt compared to covenant EBITDA as defined in our senior credit facility stood at 382 times at the end of the second quarter compared to 4.18 times in the year ago period.
Dan mentioned, our acquisition of 19 restaurants during the second quarter for which we paid $38 million.
Want to point out that we intend to complete sale leaseback transactions on 12 of these acquired restaurants and expect to receive proceeds of approximately $21 million during the third quarter of this year.
Adjusting our second quarter and net debt. So there's income and cash lowers our net debt leverage ratio at June 365 times and resulted in a net purchase price for the restaurants of $10.7 million.
As previously announced we completed a private offering of $300 million of senior unsecured notes due 2029. This transaction reduced our secured debt to $220 million and our secured debt covenant EBITDA ratio to 136 times as a result of this transaction, we now have a fixed.
Interest rate on all of our debt for the next four years.
During the second quarter of 2021, the company did not repurchase any shares of its common stock.
Due to our limited trading window as a result of the private debt offering the board of directors has approved an extension of the company's 2019 stock repurchase program, which was set to expire on August <unk> 2021, and has approximately $11 million of its original $25 million in the past the remaining.
The program will now expire on August 2nd 2023, unless terminated earlier by the board of directors.
In our last conference call, we provided a few guidelines on food beverage and packaging costs and labor trends for the remainder of 2021.
After the unprecedented cost volatility that we experienced in the second quarter. We are reluctant to provide a revised outlook. The only knowns at this point are we.
We increased menu prices in July and intend to do so again in October and B, having drive through and delivery channels provides us and other operators with a resilient top line stability.
In terms of commodity costs, we have no other guidance to provide the other than the food supplier. Our foods Flyer believes that some of the levels. We have seen the summer should we get to retreat with exception of Cork.
As the year progresses, we believe that labor margin labor cost margins will get some relief and higher menu pricing lift net sales and we continue to expect our labor margins on a full year of 2021 will remain below that of 2019 levels.
We are also maintaining our net capital expenditures target at $60 million, consisting of rolling out outdoor digital menu boards to 450 restaurants, this year, including our popeyes restaurants as of today 689 of our restaurants have outdoor digital menu boards in place.
New kitchen equipment that was installed at our Burger King restaurants for the preparation of the new hand, breaded Chicken Sandwich was also a part of the $60 million net capital expenditure number.
Third we expect that number to remodel approximately 25 restaurants of which seven only popeye's and finally, we expect to build nine new Burger King restaurants, two of which have already opened and two of which one should go online next year. We also are building one new popeyes restaurant this year.
To conclude.
The quarter certainly brought us some unexpected challenges, but we think they are manageable and we continue to believe that we will generate meaningful free cash flow. This year. In addition, the payment of a special dividend demonstrates our commitment to enhance shareholder value, while keeping our leverage in check.
And with that operator, let's go ahead and open the line for questions.
Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you've.
You May press Star two if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the Starkey. Our first question comes from the line of Jake Bartlett with tourist Securities. Please proceed with your question.
Great. Thanks for taking the question My first was on the on the wage inflation that you're talking about the 12% wage inflation U S.
We think about how temporary that might that level might be can you break down the impact of overtime.
Then.
Maybe training or versus the kind of the core underlying wage inflation that you're seeing.
Excluding overtime that it was 11, 9% and excluding overtime the increase was 10, 4%.
On average hourly rates.
So over time, that's a factor, but it was not it was not a huge factor it was mostly the supply and demand.
Dynamic in the quarter.
Got it got it and then just just in terms of the chicken sandwich.
I think in the past you commented that youre coming out of the gate fairly strong in a number of stores. It seems to have decelerated from from that can you give any any thoughts as to maybe why the sandwich didn't hit some of the targets I think that you were you in the system was hoping to see and then also just the trajectory of the <unk>.
<unk> sandwich sales have they've been did it come out strong and then decelerate you know any evidence that that it might you know momentum might be stabilized or we're building in.
Thoughts there would be helpful.
Yeah. This is Dan.
The Santa much did come out quite strong and remains strong as Tony said in the northeastern and Midwestern markets.
We were at a on average for the entire company we were in the mid sixties.
One of them was during the advertised launch and it has decelerated to the point, where we're now in the mid Forty's.
Yes.
Okay and again just in the context of that.
I believe yourself and about 28 of the prior sandwich. So so.
I think the comment was you kind of doubled in the quarter, but now youre doing less than that now.
Yeah, No I think yeah, I think we're we're not doubling what we were doing previously, but we're selling about 18 or 19 more per day at the same price that we were selling the previous sandwich.
Okay and again as you think about just the remainder of the year and I know in the past you've expressed some confidence just in the in the marketing calendar promotional calendar on menu innovation, but as you look at the remaining.
Five months, we have here you know how how confident are you that that that there's some driver too to an acceleration of comps or maybe just kind of holding or gaining some market share.
Look at the plan you know how good you feel about it.
Well I think is.
RB I sat in there in their call.
They're doing a lot of things in terms of menu innovation looking at the value of portion of the menu.
Looking at how we can increase the <unk>.
Advertising and product development around breakfast.
So I'm hopeful that those things will transpire.
Transpire between now and the end of the year.
Great I'll pass it on thank you.
Our next question comes from the line of Brian Mullan with.
Deutsche Bank. Please proceed with your question.
Yeah.
Okay. Thank you I'm just curious.
Dan or did the labor situation negatively impact your sales, but any way in the quarter. I know you know in the prepared remarks, Dan you referenced having some issues with managers that opening or closing times as an example.
Is that something that you can clearly see and measure in the business.
If you're able to quantify it yep yep.
Yes, Bryan we do.
Measure that and we think it's about a half.
Like 50 bps of our comp sales.
Our concept is probably 50 bps, that's lower than they would have been had we did.
<unk> been able to staff everything optimally.
So not a huge amount, but it was definitely.
Was definitely a factor in the quarter.
Okay. Thanks, Tony and then just as my follow up you know I saw you took 2% of price in July you mentioned, maybe take another price increase in October can you can you just speak to how you plan to approach that October decision I mean, the comp sales are running nicely above 19, which is great.
But the you know the Traffics on all the way back, which is which is an industry issue not a not a carol's issue, but how do you strike that balance of keeping value for the consumer but also protecting your margins. When you make these decisions just how you plan to approach it.
Yeah, we we approached the pricing decision is pretty much the same all the while all the time, Brian which is we look at what our competitors are doing in each of the markets. We don't take a.
Broad based approach across the entire company, we actually have 15 different levels of pricing across the company. So we look at the competitive pricing on a DMA basis as well as looking at what the promotional.
Patterns, you're going to be in the.
And the marketing calendar and then we adjust our pricing accordingly.
What we don't want to do is simply increased prices and drive.
More people into whatever the promo might be.
Okay. Thank you.
Our next question comes from the line of James Rutherford with Stephens, Inc. Please proceed with your question.
Thank you and good morning, Dan and Tony I wanted to touch on this 40.41 cent per share special dividend clearly, it's a significant amount for your shareholders. I. Just was hoping you could talk a little bit about what led you and the board to make this decision and please rank your capital priorities for the capital allocation parties for the remainder of the year.
Sure James.
What prompted us to this decision as a board was.
We wanted to return cash to our shareholders, which is something that we had been indicating for the entire year, we said that on the prior call and Lee said it since then.
Share repurchases certainly will continue to be a part of the dynamic as we go forward.
The share repurchases that we did in 2020.
Really didn't have the impact that we had hoped they would and this is a direct contribution right back to our existing investor base, which has been loyal to US now for several years as.
As far as our capital priorities we.
We will continue to look at our $60 million Capex number.
Roughly $15 million to $20 million of that is.
The ongoing maintenance capitalized maintenance and new equipment for stores and that sort of thing and then the balance of that to $40 million will be allocated against the new builds and remodels.
The priority being probably remodels, because we have several of those were.
The franchises are coming to term and we also think though there would be inadequate return too.
To do the remodel.
That $60 million does not include any monies that we might spend on M&A activity.
Okay got it and then coming back to the staffing issues and the entire industry is dealing with just curious Dan what are you. What are you all doing to address that I mean, obviously, just increasing wages as part of it do you think.
Your wages are where they need to be now to be competitive or is there kind of more to come just what's your overall feeling about how you handle this in the next couple of quarters.
No I think I haven't really seen a big spike in recent weeks James It looks like things are somewhat stable. The issue now is getting people who want to come to work. So it's not so much.
I think you saw in the industry press that there's there's more job openings than there is supposedly people who are on unemployment.
So it doesn't seem to be so much of a wage issue right now.
As it is just people who for whatever reason don't want to come to work.
The our staffing levels at the store level right now are pretty good are the wage increases that we've done have been to retain the existing employee base.
And and having enough employees, so that we can not have to pay overtime.
My primary focus is on the overtime issue because frankly, you don't get much benefit from that at all.
50% more for less productivity.
Got it.
Just last one for me and I'll hand, it back, but there was a comment at the end of the prepared remarks about I think it was working with RBI to optimize menu, maybe better margins I didn't catch all of that can you just give us some more color on what that meant specifically and also.
Tony if you could give us kind of what your total menu prices running today, including the most recent increase plus what you did back in March. Thank you very much.
Yeah.
Yeah, that's what we're referencing in that sentence was the fact that.
That RBI has us adjust in response to the commodity price commodity pressures RBI is actively addressing some of the value meal. So instead of having.
10, chicken Nuggets for $1.49 in reducing it to a chicken nuggets and instead of having the bacon cheeseburger on the dollar menu, they're taking you have to bake in to support such an expensive commodity right now so I think theyre, just theyre just being super responsive to.
For the brands for the benefit of the franchisees to what's happening in the cycle for commodity pricing.
And some of the value menu items some of the value menu items. So the prices were capped at a certain number.
Cash has now been adjusted so we can we can increase the price of some of those items by either 20 or 40.
That said as well yeah.
Yes.
Our next question.
Oh go ahead I'm sorry.
All right Jamie the last part of your question was overall commodity cost inflation for the year what was the.
No problem.
Whereas pricing, we're at 4% over last year right now and when we looked at the removal of the price caps that could be another 1.5% to 2%, which takes effect today actually.
I would expect that we could end the year at somewhere in the 6% range in terms of year over year pricing.
Our next question comes from the line of Fred Wightman with Wolfe Research. Please proceed with your question.
Hey, guys. Good morning, I just wanted to follow up on that last point, if you do get to 6% pricing I'm wondering how you feel potentially being above broader food away from inflation.
And what that could mean for share versus some of the other <unk> Burger peers.
The most recent data that I've seen it indicates that Mcdonald's right now is about 5% pricing year over year.
And my guess is that their franchise system, probably will be looking at more pricing between now and the end of the year as well. So I think that's more relevant as a as a comparative base as opposed to.
The food away from home.
Phenomenon. So we will continue to make certain that our pricing is in line with our competitors.
Okay, that's fair.
And I guess just broadly.
Would love to get any updated thoughts from the stickiness that you are seeing on check I know that you guys had sort of signaled that that was something that you would thought it would be a tailwind relative to pre covid levels, but have you seen anything change in terms of.
You know either larger group orders persisting delivery mix being a little bit stronger longer than you'd thought anything that you'd highlight there.
I would say the average check is holding up incredibly resilient.
As we reopen.
So we're.
It's staying above $9.
And.
Even as we're seeing traffic.
Traffic was up.
12%.
In the second quarter, so even with that increase in traffic since the price the average tickets that staying at $9. So that's that's holding up really strongly.
Yeah.
Great and then there was a comment about higher transaction multiples for stores in the private market could you just give an update on what you're seeing.
In the market and.
How we should think about that going forward, because I think Dan I think you made a comment theres no multi unit.
Deals in the pipeline, so maybe what you're seeing on the multiple side and then what if anything it would take for you guys to get more active in the market again.
Although I had Tony.
I was just going to say that.
On the stores spread.
Brad that we bought.
The 19 stores.
The multiple on those net of the sale leaseback proceeds were getting this month.
Is under five times. So that's you know that's obviously.
Very attractive for us but.
We've seen in the marketplace a number of transactions in the nine to 10 multiple range for multi unit.
Acquisitions.
Mostly private equity family offices shifting assets around that sort of thing.
So that's what we're that's what we're not going to compete with.
Also indicates.
It's another indicator of what we think as you know.
Is undervaluation of our of our share price that sort of thing.
And just one final one does that nine to 10 X multiple for sort of multi branded.
Deals.
What what sort of concepts are trading at that multiple.
I think they were single they were single brand deals.
So that's that's what we that's what we've that's what we've been seeing out there.
Okay. Thanks, guys in terms of in terms of what would attract us back to the market. We have historically paid and the five times range EBITDA and that's that's where we'll continue to be.
So that's one would attract us back into the market will continue to look for those deals.
And if there are either popeye's your Burger King operator so.
<unk> become available.
At that level at those multiples then certainly we've got the cash to be a player.
Yeah.
It makes sense. Thank you.
Our next question comes from the line of Jeremy Hamblin with Craig Hallum. Please proceed with your question.
Thanks, So I want to come back to the labor inflation.
So real.
Kind of.
Initial thrust in the economy.
You mentioned that was a challenge getting people on site I'm wondering here now in August the 12%.
Wage inflation are you starting to see any relief on that front or do you think that.
This is likely to be an issue.
Until the supplemental unemployment benefits subside.
I don't see the rate continuing to increase I think it stabilized, but I also don't think that the rate.
Except for the overtime piece I don't see the rate coming down I think the rate is going to be the right.
I don't see that we're going to be able to hire employees for much less than.
The rates that we're currently paying but it seems to have been.
Stabilized.
Over the past two or three weeks.
Got it.
And then the special dividend.
8% yield really fantastic.
Fantastic for shareholders.
Is that something now you know as you.
Mentioned 15 years public our first time doing this.
I am a little curious as to what changed in thinking about may.
Making that decision I know you're on the board.
And then secondly is this a use of capital or.
Capital allocation that is something that I know youre not instituting a regular quarterly dividend, but is this something is it means.
For potential.
Future distributions through this measure.
Well I think special dividend is just that Jeremy It was it was a one time event and what the board concludes that we're going to do on a go forward basis as it relates to a current.
Dividend.
And ongoing dividend <unk> share repurchases.
In excess of the $11 million that is currently been approved so those discussions will take place in.
In the future. So right now the only thing that has been agreed to with this.
One time 41 special dividend.
Yes.
Fair enough last thing I want to come back to us.
The acquired locations and.
They continue to be laggards, even though they're lapping actually much easier comps in the stores in the northeast and the Midwest.
I don't know that I can recall.
Having so much challenge with particular geography.
When you've acquired locations are you generally have had a fantastic track record of.
Bringing those locations up to our legacy levels in terms of both vs.
As well as restaurant level margins.
And so it's been two years now what what.
What do you need to change what Youre doing.
In those stores can you help provide some color of why because the GAAP I think has actually widened.
Substantially versus where it was one year acquired them.
Yeah.
The majority of that the Cambridge deal.
Where you see the the sales dislocation is there's really two markets Tupelo, Mississippi area, and Memphis, and the operational metrics in those markets actually have improved dramatically and they're quite close to where they are at in terms of the legacy stores.
No I don't think it's a it may be a burger King brand issue. It may be a <unk> ratio in those markets that may be an economic issue.
We're working with RBI to try to drill down on that but.
I don't think it's anything that's Carol specific now.
So you're saying the operational metrics relative to the au vs that are being achieved right. So this to me it seems like it's more of a sales issue than a.
Right, you've done a great job of improving margins relative to the sales, but I think it's.
And in the consumer metrics, which which is generally what you work on to improve your sales. So the consumer metrics actually are pretty close to where we are across the board.
In terms of all the data we get back from.
Guest Drax and customer service data and that sort of thing. So it's not really I can't put my finger on it and say that it's a specific operational issue.
And therefore, I think it's more broad based across.
The category in perhaps the entire economy in those two markets.
Got it.
Got it thanks for that color guys best wishes.
Thanks, Sean.
Our next question comes from the line of Brian Vaccaro with Raymond James. Please proceed with your question.
Thank you and good morning, I just wanted to circle back to the sales cadence you saw through the quarter and Dan could you just frame what the monthly BK comps looks like versus 19 moving through Q2.
And Tony can you.
Okay.
Yeah, let me just find that data.
So versus.
On a monthly basis versus 19.
April was about 10% and then excuse me.
It's about.
6% for May and June.
Versus.
<unk>.
Versus 2019.
Okay, and then you said I think mid mid fours for July.
With memories, yes.
Okay. Okay, great alright, thank you for that and Tony I appreciate the color on the commodity front and the updated beef forecast and sorry, if I missed it but what was a year on year commodity inflation on the basket in the second quarter.
And I guess taking into account the latest supplier forecast what is that year on year inflation trend looked like moving through the second half or maybe you could help frame. The Cogs ratio does it go down from here you know versus Q2 because of the pricing and maybe some of the sequential trend just if you could help us frame to make sure. We're all on the same page.
Yeah overall for the year.
We're expecting six to six 5% commodity inflation.
And again to your point if.
To the extent that the menu price increases lift to overall sales.
That should take pressure off the <unk>.
Cost of sales margin, but it's really hard to it's really hard to predict given the.
Theres so much sure.
Impressive and stuff going on with commodities.
It's like whack a mole once one keeps gets under control the another one comes up in.
There is shipping.
And so it's really hard to hard to predict but that's based on our suppliers.
This forecast when that gets sort of 66 to six 5% for the study.
Year overall.
Okay, and what was that in Q2 or even if you have a first half what was the commodity inflation you saw in the basket do you have that handy.
I do.
It was about.
One point.
152%.
In the second quarter, Okay, because remember if beef was really high there.
The reason, it's not really indicative because beef was really high in the second quarter of 2020.
So beef was actually pretty much flat.
So.
Right I think we're ever going to see the harder comps.
On beef is going to be in first quarter was pretty.
Pricing was pretty good on beef in the first quarter. So I think even though it's expected to moderate somewhat I think that's where they're going to.
That's where the headwind is going to be for the rest of the year yes.
Yeah, Okay that makes sense and then I just wanted to circle back to you on the acquisition of the 19 units.
The dollar amounts of little under $11 million net of the real estate can you just give some more color or the performance of these units average sales or profitability and is there an opportunity for significant margin improvement as you've seen historically.
Yeah, I think that there are.
I don't know about significantly again, but certainly there's opportunities both labor and cost of sales.
And certainly and then the smaller.
Acquisition, the threat and Theres a lot of opportunity.
700 basis points.
Larger acquisition.
Pretty typical of what we've seen other acquisitions. So we can be able to get another 50 or so basis points.
Okay, Great I'll pass it along thank you.
Sure.
Our next question comes from the line of Jeffrey Bernstein with Barclays.
Question.
Great. Thank you very much.
Following up on the earlier question with regards to the.
Sales trends versus 2019.
I think you mentioned that started 10% last quarter now going forward.
I was wondering if two of them actually that what you've heard.
Indicative are similar with the broader industry or is it maybe.
A very specific issue in terms of just a slowdown.
The slowdown versus the more common will maintain period.
Right.
Yes, it seems like it seems there's a little bit of socks up right now.
Gregory specifics.
<unk>.
Thanks.
It seems the.
Childcare.
Payments come next week.
So that should help things and.
The latter part of August.
And so.
I just think it's general.
Malaise out there and you know whenever we see sort of.
Never.
The two examples we have.
When covid.
Picks up like it did obviously.
In March 2020, and then over the summer in 2020.
There's a little bit of.
Softness in that.
Hum.
Come through.
Pretty strong results so thanks.
No Mike.
And I think we're just seeing a little bit of that.
Given the delta various.
So things should stabilize since that.
It's under control more or better understood I guess.
It makes sense and then in terms of the.
The menu.
Like in this environment.
Because you've been.
Taking into successful premium product.
Downplay the pushing more value oriented products I was wondering whether that situation.
When you look at your value, whether it's dollar items or any sort of promotion where is that today versus perhaps it had been pre covid to get engaged with the consumers moving towards those items what perhaps.
It's interesting that you're moving more towards premium.
There's a there's really three components to it.
Value menu will continue to be a value menu.
So I really like what price points may be 20.
Previously so instead of $1 <unk> dollars 20, which is still a value.
The breakfast component.
Generally the whole reset it.
Two three or four kind of thing breakfast that won't continue.
And the balance of the promotional calendar still will have some digital coupon and a fair amount of digital coupons.
Coupons will be less than they were.
In 2019 and 2020.
And there will still be.
Value meals so.
Some of your competitors are running.
$4.
Some are running off.
And.
Burger King will continue to participate in that realm as well.
Yes.
Understood.
Lastly are you seeing any ear.
Maybe you mentioned this earlier I apologize if I missed in terms of.
Getting apple to work and as I mentioned, there is more available.
When they're unemployed.
In markets, where perhaps they already restricted.
Extended unemployment benefits.
Have you seen where in those markets, you're actually seeing an increase in apples and swiftly.
Presumably the nationwide and think of that in the early <unk>.
September.
The applicant flow has picked up.
What we're challenged with Morris I will now.
And I can recall is.
People continuing to show up their shops.
It makes.
So whether it's.
Somebody may just decide to date and that did they come to work.
So that's the challenge that we primarily up right now.
We're getting applicants.
We've increased resources in terms of sourcing mosaic.
Interviewing.
So that way we can.
Recruiting folks who are more reliable and responsible in terms of showing up for all of their ships.
Anecdotally.
Does it look.
Burger King restaurants, with signage upfront, saying that $20 an hour for 12 P. M midnight.
So.
It seems like the PE is definitely there.
We don't.
We've reduced start 24 hours doors because.
In our world, where we have stores.
It doesn't make any sense.
Keep your eyes open.
Okay.
We don't have any income approaching at the highest rates that we have.
David by the state of New York, which is $15.15 in the quarter.
Some stores here and there.
We got.
$20, an hour unless they've got fabulous pricing in these long islands doors that.
It doesn't work for us.
Agreed thank you very much for the color.
Our next question comes from the line of <unk> Martinson with Jefferies. Please proceed with your question.
Good morning.
Thank you.
And direction from the chicken sandwich.
Talk about how you guys are doing on the breakfast front are you seeing people returning back to work.
Is the thought here post labor day.
Coming back to the office in a.
It becomes a bigger part of your business.
Sorry go ahead Tony.
Breakfast all.
Parts were.
In the second quarter.
So.
I think the issue breakfast is it's really going to be.
Driving breakfast is going to be.
Some of the new products.
Barbie is coming out with some breakfast that we're excited about so I think that's going on.
And obviously, there's a lot of competition.
We have seen an improvement in that Descartes and.
We have some of the product changes that are coming along further.
Increases.
Yeah breakfast.
20 breakfast was negative about 22% during Q2.
And this year, we were positive 31.34.
Okay.
So yeah.
Yes.
What one would have expected given the fact that we're now normal.
Normal breakfast hours in there.
No.
Driving around for breakfast.
R R.
Breakfast sales are proceeding well.
Okay.
There is significant opportunity in diligence.
Relative to the entire space.
Okay.
And then.
It's about pulling back on M&A for the time being multiples being that high.
The target leverage for yourself going in.
You would be willing to stretch that if an opportunity presented itself.
You know I think we're trying to.
Goal is to stay at four times or less.
Through the cycle.
Yeah.
If we do an acquisition, obviously pro forma we put the cost of the acquisition and our net debt number would be.
Add to that but we would also include the.
Pro forma EBITDA from that acquisition so it.
With that acquisition it keeps us under four times or four times or less than obviously, it's attractive to us.
We probably will.
So you are clear.
From an acquisition that would cause our leverage ratio.
Bounce above four in any significant way.
No formal basis.
Ladies and gentlemen, we have come to the end of quest.
A question and answer session I'd like to turn it back to management for closing remarks.
Thanks, everyone for sticking with us listening to our conference call and we look forward.
Because you're talking to.
Thanks Bye bye.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may just connect your lines at this time and have a wonderful day.