Q3 2022 Fiesta Restaurant Group Inc Earnings Call
Okay.
Good day and welcome to the Fiesta restaurant group third quarter 2022 earnings conference call.
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I would now like to turn the conference over to Raphael gross from ICR.
Please go ahead.
Thank you operator Fiesta restaurant group's third quarter 2022 earnings release was issued after the market close today.
If you have not already accessed it it can be found on the company's website Www Dot F. R. G I dot com under the industrial relations section before we begin I'd like to inform you that during the call. The company will make various statements that are not based on historical information. These forward looking statements include without.
Patient statements regarding the company's future financial position and results of operations business strategy budget projected costs and plans and objectives of management for future operations actual outcomes may differ materially from these forward looking statements and the company can give no assurance that such forward.
Looking statements will prove to be correct.
Factors that could cause actual results to differ materially from those expressed or implied by the forward looking statements can be found in the company's SEC filings. Please.
Please note that during today's conference call certain non-GAAP financial measures will be discussed, which the company believes can be useful in evaluating its performance.
Any discussion of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP and a reconciliation to comparable GAAP measures is available in the company's earnings release on the call with me today are president and Chief Executive Officer, Rich Stockinger Chief experience Officer.
<unk> and senior VP of strategic initiatives, Patti Lopez, KAR, and Chief Financial Officer, Dirk Montgomery, and now I'd like to turn the call over to rich.
Thank you Ralph.
I'd first like to thank all of our investors and other participants on the call today and their continued support.
I'll be covering three topics today.
Business update.
An overview of our third quarter results.
The status of our strategic growth initiatives.
Thoughts on our plans to successfully close out 2022.
Derek will then provide a financial update.
Before we open the call for questions.
We also had paddy low pet scans.
Our chief Executive Chief experience Officer, and senior VP of strategic initiatives here with us available to buy more color.
And our strategic initiatives.
During the Q&A session.
First.
He takeaways on our third quarter results.
The third quarter of 2022 was a positive quarter for the business.
Progress being made on all fronts and meaningful quarter over quarter improvements in our results after factoring the impact of Hurricane and honor operation.
We saw continued traction across our key priority.
Driving traffic growth.
And improving margin.
And our strategic growth initiatives are building momentum.
Providing more color on our accelerating sales trend.
Comparable restaurant sales improved to double digit growth in the third quarter.
Excluding the estimated impact of the hurricane.
Further accelerated in October .
Moreover, our traffic comps improved approximately 140 basis points in the second quarter to the third quarter.
Exclusive of the negative impact of hurricane in approximately 220 basis points.
Our accelerating comp transaction momentum was a direct result.
The actions we shared previously.
Food staffing expand our sales growth initiatives and continue our success.
Just on pricing.
Item priced.
With check accretive limited time offers.
As we noted previously.
Improving staffing levels had been a key enabler.
The transaction closed.
Staffing levels improved measurably in the third quarter versus the second quarter.
Further with you in October .
So long.
With the ongoing impact of our growth initiatives should enable us to further accelerate comp traffic growth in the fourth quarter.
Our top line momentum is building.
Not only in total.
But each of our key markets.
All key markets improve their comp transaction trend in 'twenty versus 2021 in the third quarter versus the second quarter.
After adjusting for the estimated hurricane impact.
In addition.
West Palm and Orlando markets generated positive comparable transaction growth versus 'twenty, 'twenty, one and the third quarter after factoring the hurricane impact.
Oh, Gee, Miami Dade market meaningfully improved its overall staffing levels in the second the third quarter.
Which was a key driver.
The approximately 600 basis point improvement in comp transaction trends in the second quarter to the third quarter.
With the third quarter comp transactions down only one 5%.
Compared to 2021, excluding the hurricane impact.
In addition, our.
Pricing innovation.
Promotion strategy are contributing to revenue growth momentum.
Regarding pricing, we continue to take a phased and targeted approach to pricing.
Distance from our pricing analytics consultant.
Yeah.
So opportunistically recover margins.
Minimizing the negative traffic impact.
<unk> action.
This strategy includes applying a barbell approach.
By carrying lower price increases.
High value affordable items like real time.
Family meals.
Sure, we maintain our value proposition.
Combined with offering check accretive limited time offers and menu innovation.
In the third quarter, we took pricing action of 4% in September .
We saw a positive impact on check averages.
The return of our higher priced limited time offer.
As well as the continuation of the Churrasco steak proteins and Grill Master trio.
Our revenue optimization strategies.
Their effectiveness.
Evidenced by the following.
Are your perceptions for the polo brand could be.
To be significantly above local she was our benchmarks.
Based on recent N P. A M P S data.
It by Qualcomm.
Oil pump profit trends.
The hurricane in July and August outpaced.
And that tracks, Florida gas.
Casual comp traffic trends.
In addition.
Our customer price sensitivity.
Measured by per sample.
Actual media.
Consumer surveys has remained in line with historical levels.
We are clearly seeing better coordinated uptick.
Balance.
Menu innovation.
Notionally activity.
Analytic based pricing.
It's helping to build revenue and win back chart.
We are pleased with our margin improvement in the third in the quarter after considering the hurricane impact.
Particularly the margin run rate that we saw at the end of the quarter following 4% September price increase.
We continue to drive margin improvement.
And we expect to exit 2022.
Targeted restaurant level operating profit margin range.
18% to 20% on a run rate basis.
Dirk will provide additional details on sales and margin trends as part of these up.
Now I'll provide a brief update on the status of our strategic growth initiatives.
The priorities, we communicated previously remain unchanged.
And we continued to make significant progress during the third quarter across all of those initiatives.
Most notably our refresh remodel program.
Continues to generate.
System sales growth.
Comparison to boil local market unit trend.
Refreshes to date have generated a very good sales.
Approximately 4%.
We completed 26, refreshes and Remodels by the end of the third quarter.
And expect to complete four to six additional units in the fourth quarter.
Mark and his team have become successful implementation.
All of our G&A expense reduction plan.
Including but not limited to.
The outsourcing of accounting transaction processing.
And downsizing, our Dallas Service Center and office space.
Which will meaningfully contribute to an ultimate.
And G&A for a targeted range of eight point by two 9% of restaurant sales.
Our digital platform continues to gain momentum.
It is making a growing contribution to revenue growth.
We made great strides in enhancing our digital platform with the ongoing rollout of a digital drive through technology.
With five units completed to date generating encouraging average drive through channel sales growth.
And eight to 10 units to be completed by year end.
In addition, we are seeing growing.
Customer usage of our App.
The QR code feature and curbside.
Which contributed to 14% digital platform.
Sales growth in the third quarter versus 2021.
Closure.
Of the hurricane.
The operations and HR team led by Pat.
I've made great strides over the course of the year, a number of important areas to improve our overall talent level.
Overall staffing levels have improved significantly.
Over to the highest levels since the first quarter of 2021.
It's you food staffing has contributed measurably to our.
Building top line momentum.
Our talent development platform improvements have resulted in a decrease turnover.
And increased internal promotions.
Parts of the rollout of our enhanced.
Comprehensive restaurant leadership development.
And talent management training.
Based on the success of the program.
We are expanding this platform in the fourth quarter.
Clean include enhanced training for assistant managers.
Our focus is on leadership skill.
And talent bench.
In summary, we are encouraged by our continued strong sales momentum.
And the traction on our growth initiatives, thus far in 2022.
And are intensely focused on driving ongoing traffic growth across all channels.
We're taking action to.
To improve margins.
Now Derek will provide a more detailed financial update.
Thanks Rich.
We turned in very good financial results for the quarter with growing sales momentum and improving margins. We were very excited to see strong comparable restaurant sales growth in the third quarter of nine 3% versus 2021 despite the impact of the hurricane, which we estimate reduced comparable sales by approximately 2.6.
Percent.
And then further accelerated in October with comparable restaurant sales up 12, 9% inclusive of the negative impact of the hurricane at 40 basis points the.
The most encouraging news on our sales trend was clearly our improvement in comparable traffic trends, which improved 220 basis points from the second quarter.
Third quarter, even with the hurricane impact.
The action items, we shared last quarter, including our focus on improving staffing operating value oriented promotions and ongoing menu innovation are all working and building top line momentum.
Regarding sales performance total revenues increased seven 9% to $95 6 million in the third quarter of 2022 from $88 6 million in the third quarter of 2021, driven by the comparable restaurant sales increase partially offset by the negative impact of the hurricane estimated at approximately two points.
$6 million.
The third quarter improvement compared to 2020, one resulted from a 14.6% increase in the net impact of product channel mix and pricing and a decrease in comparable restaurant transactions of five 3%, including approximately two 2% due to the negative impact of the hurricane.
The third quarter 2022 positive mix impact was driven by the addition of check building higher ticket menu items, such as the Grill Master trio and Tarasco as well as the continued success of check accretive limited time offers including the return of our red offer that performed very well.
The third quarter 2022, consolidated net loss was $2 9 million or 12 cents per diluted share.
There was a minimal impact from discontinued operations during the third quarter of 2022.
This compares to consolidated net income in the third quarter of 2021 of $17 3 million or 66 cents per diluted share, including 78 cents per diluted share positive impact from discontinued operations as a result of the gain on the sale of Taco Cabana.
The third quarter 2022 loss from continuing operations was $2 9 million or 12 cents per diluted share compared to the third quarter 2021, net loss from continuing operations of $3 2 million or 12 cents per diluted share.
On an adjusted basis third quarter 2022, consolidated net loss from continuing operations was 2.4 million or 10 cents per diluted share compared to the adjusted net loss of $2 4 million or nine cents per diluted share in the third quarter of 2021.
Do you see the non-GAAP reconciliation table in our earnings release for more details.
Consolidated adjusted EBITDA, a non-GAAP financial measure grew to $3 9 million and four 1% of total revenue in 2022 compared to $3 7 million or four 1% of total revenue in 2020 one.
We estimate that hurricane in negatively impacted consolidated net loss from continuing operations and consolidated adjusted EBITDA by approximately $1 6 million.
Loss from operations was $3 2 million or three 4% of restaurant sales in the third quarter of 2022 compared to a loss from operations of $3 8 million or four 4% of restaurant sales in the third quarter of 2021.
Turning to restaurant level results restaurant level operating profit margin, formerly restaurant level adjusted EBITDA margin.
And the non-GAAP measure was 14, 1% in 2022 compared to 14, 7% in 2020 one.
Restaurant level operating profit margins declined during the third quarter compared to 2021, primarily due to the impact of the hurricane.
Our utility costs repairs and maintenance costs.
Advertising costs insurance costs, as well as commodity costs, partially offset by the impact of higher restaurant sales.
Yeah, and the estimated impact from the hurricane on restaurant level operating profit was approximately $1 6 million or 150 basis points of restaurant sales.
After considering the hurricane impact we were very pleased with our margin growth in the quarter, particularly the margin run rate at the end of the quarter following our 4% price increase.
Regarding third quarter trends in key expense categories cost of sales as a percentage of restaurant sales in the third quarter of 2022 increased to 32, 4% compared to 37% in 2020, one due to higher commodity costs and sales mix, partially offset by our phased menu price increase and improvements to.
Due to operational efficiencies.
Restaurant wages as a percentage of net sales decreased to 26, 2% in the third quarter of 2022 or 28% in 2021 different.
Maryland by lower special incentive in bonus pay partially offset by the impact of higher wage rates.
Other restaurant operating expenses as a percentage of restaurant sales increased in the third quarter compared to 2021, due primarily to the impact of higher utility cost higher repair and maintenance costs and higher insurance costs, partially offset by lower operating supplies and delivery expense.
General and administrative expenses increased to $12 1 million for the third quarter of 2022 from $11 2 million from the third quarter of 2021, due primarily to higher employee and other support costs.
General and administrative expenses for the third quarter of 2022 included <unk> 9 million in nonrecurring expenses comprised of <unk> 7 million of G&A efficiency initiative costs, including <unk> 3 million for accelerated charges related to deferred implementation and service contract costs related to our current accounting.
System and point $2 million of digital platform costs.
G&A expenses for the third quarter of 'twenty 'twenty. One included <unk> 2 million related to nonrecurring digital platform costs.
Turning now to cash flow related comments in.
In the third quarter of 2022 our total cash balance grew $3 3 million from the second quarter of 2022 to $46 2 million, including $3 6 million of restricted cash.
Capital expenditures in the third quarter of 2022 or $3 7 million. In addition, we continue to have no debt on our balance sheet and have 10 million in undrawn revolver capacity as an additional source of liquidity is part of the loan agreement we executed in 'twenty one.
We are continuing efforts to finalize settlements on the winter Storm insurance claim we noted previously which represents a potential future cash inflow once that claim is fully settled.
In addition, we expect to file insurance claims associated with the impact of Hurricane and upon completion of our final assessment of damages and losses.
I'll close with a few comments on our outlook for the remainder of 2022.
We are very encouraged by our sales momentum in 2022 it continued to further accelerate in October we are very focused on achieving our growth objectives through our four key growth initiatives.
We are all on track and we expect the sales benefits will continue to build momentum as we realize the full impact of those initiatives.
We expect margins to improve in the fourth quarter driven by continued revenue growth from our accelerating traffic trends from improved staffing effective value focused promotions menu innovation and the impact of the pricing action. We took in September combined with stable wage rates and commodity costs in comparison to the third quarter.
We expect to exit 2022 at our targeted margin range of 18% to 20% on a run rate basis, barring any unforeseen changes in our cost structure and operating environment.
During the fourth quarter, we will expand the implementation of our G&A efficiency efforts, including but not limited to generating savings from accounting service providers. The ongoing outsourcing of accounting transaction processing and the downsizing of our Dallas Service Center office space, which will meaningfully contribute to the ultimate reduction in G.
In a targeted range of eight 5% to 9% of restaurant sales.
<unk> capital expenditures, we expect full year 2022 capital expenditures to be in the range of $20 million to $25 million.
In closing, we demonstrated strong sales growth as well as ongoing margin improvement in the third quarter, which we expect to continue as we build on the momentum of our strategic growth initiatives.
Finally, we will continue enhancing the customer experience across all service channels further investing in our growing digital platform and the development of our field management teams.
Finding our brand position in New unit design features in addition to refresh and Remodels to drive future growth.
And unlocking unmet demand through improved kitchen productivity.
Thank you and this concludes our prepared comments.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone and if you are using a speakerphone. Please pick up the handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
We have a question from Edward Reilly from E F Hutton.
Edward Please go ahead.
Hi, guys. Thanks for taking my question and hope you're staying safe down there with the hurricane I'm not sure if I missed this or not but I'm wondering if you're able to comment on traffic trends for those restaurants.
Impacted by the Hurricane for the month of October .
Yeah, Hi, I had it it's Derek.
So.
Just a just a recap.
The <unk>.
Corner results, we did see a significant improvement.
In the third quarter, and Tom transaction trends relative to the second quarter.
After adjusting for the hurricane it was actually a 360 basis points.
Yes.
We are seeing.
Patrick trends continuing to show their improvement in October relative to Q2.
And.
We actually have we'll provide a lot more details when we report the fourth quarter in terms of.
More specifics so hopefully that helps.
Okay. Thanks, and then I noticed you guys went from 138 to 137 stores I'm just wondering what led to that decision to close that one store.
Yeah, Rich Hi, Ed how are you we had a long.
Relationship in store in Gainesville that had been underperforming for some time and it needed a significant amount of capital to do a refresh and remodel.
Was made best to use the capital elsewhere.
So we shut that restaurants down.
Okay Gotcha.
Just on an absolute basis.
How much do you guys expect to see.
By outsourcing the accounting system and downsizing the office space in Dallas.
Yeah, I mean, we we haven't disclosed that number but I would as we said.
We definitely expect.
The combination of those two events as well as.
The.
Reduction in service provider fees.
We've negotiated two it'd be meaningful in terms of our reduction in G&A as a percentage of sales.
We won't realize the full benefit of those programs until.
Early in 2023, so we won't see.
The full benefit of that in the fourth quarter, because we're still in implementation.
But it's it's a it is meaningful for sure.
Okay got you and last one for me.
Any any new menu items that you guys are thinking about.
That maybe youre looking at.
Put on for.
Holiday season.
Yeah, I'll take that and I'll turn it over to Patty.
It's a tradition, especially at pollo.
For pork and around the holiday season, so we're bringing back.
A pork item that is very traditional.
And I'm looking forward to the success that we've had in the past, but it's going to be led by a port fish.
Okay, great. Thank you.
Thanks, Ed.
Yeah.
And this concludes the conference. Thank you for attending today's presentation you may now disconnect.
Thank you.