Q4 2022 Fiesta Restaurant Group Inc Earnings Call
Speaker 2: star key followed by zero. After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Rafael Gross from ICR. Please go ahead.
Speaker 3: Thank you Jason. The Esther Restaurant Group's fourth quarter, 2022 earnings release.
Speaker 3: was issued after the market closed today. If you have not already accessed it, it can be found on the company's website www.frgi.com under the investor relations section.
Speaker 3: 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 limitation, statements regarding the company's future financial position and results of operation, business strategy, budget, and financial statements.
Speaker 3: projected costs and plans, and objectives of management for future operations. Actual outcomes might differ materially from these forward-looking statements, and the company can give no assurance that such forward-looking statements will prove to be correct. Important factors that could cause actual results
Speaker 3: to differ materially from those expressed or implied by the forward-looking statements can be found in the company's SEC's fire links.
Speaker 3: 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 an isolation or at a substitute for results prepared in accordance with the GAP.
Speaker 3: and reconciliation to comparable GAAP measures is available in the company's earnings release. On the call with me today are Interim Chief Executive Officer Dirk Montgomery and Chief Accounting Officer and Acting Chief Financial Officer Tyler Yosting. And now I would like to turn the call over to Dirk.
Speaker 4: Thank you, Rafe. I'd first like to thank all the investors and other participants on the call today for their continued support. I'll be covering three topics today, a business update and overview of fourth quarter results, the status of our strategic growth initiatives, and thoughts on our plans for 2023.
Speaker 4: Tyler will then provide a financial update before we open the call for questions.
Speaker 4: First, key takeaways on fourth quarter results.
Speaker 4: During the fourth quarter, we continued the double-digit comparable restaurant sales momentum from the third quarter with improved margins while continuing to make progress on the key priorities we communicated previously, including continued increases in operation staffing levels and tangible headway on G&A expense reduction.
Speaker 4: As discussed in prior quarters, we are intensely focused on transaction growth and we are beginning to see positive momentum on this front.
Speaker 4: Year-over-year comparable transactions, which had slowed in previous quarters and reached negative 2.4% in December , turned positive to modest year-over-year transaction growth at the start of 2023 and further improved in fiscal February month to date. In addition, early 2023 transaction momentum...
Speaker 4: has been strong in our key South Florida markets, which are generating positive transaction growth in 2023 versus 2022 year-to-date. Our accelerating com transaction momentum was the direct result of the actions we shared previously to improve staffing, expand our sales growth initiatives.
Speaker 4: and continue our successful pairing of value item pricing with Check It Creative limited time offers.
Speaker 4: As we noted previously, improved staffing levels have been a key enabler to transaction growth. Hourly team staffing levels continue to improve in the fourth quarter versus the first half of 2022 and have further improved year to date in 2023. In addition, managed residents aredid more than Parmesan Downs,
Speaker 4: During the fourth quarter of 2022 and into 2023, we've seen a continued reduction in hourly turnover rates, indicating that our retention levels are also improving.
Speaker 4: As we mentioned in prior quarters, we placed a high focus on the development of our restaurant managers in 2022, which in part has led to a significant reduction in unit manager vacancies from the first quarter of 2022 to the first quarter of 2023.
Speaker 4: Our pricing, innovation, and promotion strategies are contributing to revenue growth momentum.
Speaker 4: was deferred to allow us to obtain additional marketing insights and competitive benchmarks that support selected pricing action that now will be taken in March 2023. In addition, we continue to maintain our promotion bar bell approach by pairing lower price increases on our high-value affordable items like FOIA time and family.
Speaker 4: back traffic. In the fourth quarter we saw a positive impact on check averages from the pricing action of 4% in September while maintaining a higher value perception level compared to our peer group.
Speaker 4: Another point of evidence that our revenue optimization strategies are continuing their effectiveness is our modest share gain in 2022 based on Puyo Tropicale comp traffic trends, slightly outpacing NAPTRAC Florida fast casual comp traffic trends, even with our phased pricing actions over the course of the year.
Speaker 4: We were pleased with our margin improvement in the quarter after considering our originally planned December pricing that was deferred to March. Similar to the third quarter of 2022, we generated continued year-over-year growth and restaurant-level operating profit, a non-GAAP financial measure, driven by our comparable sales growth and targeted margin improvement actions.
Speaker 4: Restaurant level operating profit margins of 16.2%, improved versus third quarter 2022 margins at 14.1%, and versus fourth quarter 2021 margins of 14.3%.
Speaker 4: This year, we are targeting restaurant-level operating margins of 18% on a run rate basis through the combination of continuing transaction growth and pricing.
Speaker 4: In his financial review, Tyler will provide additional details on our expense and margin trends.
Speaker 4: Now I'll provide a brief update on the status of our strategic growth initiatives.
Speaker 4: We made good progress through 2022 on the strategic growth initiatives that we discussed in prior quarters and believe that those initiatives should largely be continued.
Speaker 4: After transitioning to the interim CEO role in December , I moved quickly to ensure that we maintain momentum while sharpening our focus on operations excellence and reprioritizing the opportunities that we believe will have the biggest impact on transaction growth and margin expansion with an eye toward accelerating the key initiatives that will have the biggest impact.
Speaker 4: In addition to reevaluating our strategic priorities, my near-term focus has been placed on working with a leadership team to optimize the organization for effectiveness and efficiency. Our initial organization changes have been aimed at continuing to improve our capability for operations support and realigning and consolidating our customer insights, digital, and non-
Speaker 4: and marketing resources under one streamlined marketing function that we believe will enable us to accelerate growth across all channels.
Speaker 4: We have developed four key themes to guide our revised strategic focus, all still aimed at growing traffic and improving margins, but with a more focused and disciplined approach. Number one, Building Operations Excellence.
Speaker 4: Number two, creating a great guest experience across all channels. Number three, enhancing the Pollo Traffic Cal brand. And number four, developing great teams.
Speaker 4: Regarding operations excellence, we have identified four key areas of focus to improve the effectiveness of our operations.
Speaker 4: Number one, improve our consistency of execution by refocusing on fundamentals through back-to-basics training and challenging our operating routines to place an increased focus on the key elements of guest experience, food quality, speed, accuracy, and hospitality.
Speaker 4: Number two, simplify the operating model. Number three, improve peak time productivity. And number four, continue to improve cross-functional operations support, including IT infrastructure, HR field support, and reporting tools.
Speaker 4: A number of the initiatives that fall within our operations excellence theme have been discussed in prior quarters and we are now making them a top priority because we believe they will accelerate traffic growth and margin expansion. Regarding the fourth theme, developing great teams, we made great progress in 2022 on the establishment of leadership development for operations management.
Speaker 4: We believe that we are already seeing leading indicators of the positive benefits of that investment in reduced turnover and improved retention of our restaurant manager level.
Speaker 4: Based on that success, our plans in 2023 are to complete the ongoing rollout of the leadership development platform across all levels of operations leadership.
Speaker 4: In addition, we are also developing operations best practices training modules to support our operations excellence initiatives.
Speaker 4: G&A efficiency and effectiveness will continue to be a high priority, and we made measurable progress on a number of efficiency initiatives since the third quarter, including the implementation of accounting outsourcing and downsizing the Dallas office in February 2023, and service vendor renegotiations in multiple expense categories. Those initiatives completed or underway are expected to meaningfully contribute to the development of a new technology.
Speaker 4: toward our target of reducing our G&A expense run rate to 8.5% to 9% of restaurant sales.
Speaker 4: After less than 90 days in my new role, our strategy development, initiative assessment, and organizational optimization are still a work in process, but our management team is very excited about the steps we have taken since December that we believe will focus and accelerate our efforts to grow traffic and expand margins.
Speaker 4: Reflecting on the year as a whole, it is easy to see the progress we have made, less so the multitude of challenges we faced as we navigated the turbulent economic and industry waters throughout the year.
Speaker 4: Comparable restaurant sales finished the year in double digits at 11% compared to 8% in the first quarter of 2022, while slightly improving our share of traffic. The most significant business interruption from challenging staff levels seems to be mostly behind us, allowing us to increase our focus on providing a consistent and high-quality guest experience.
Speaker 4: Margins are trending up and are targeted to hit 18% in 2023, while continuing to focus on growing traffic and maintaining positive sales comps.
Speaker 4: Our G&A reduction plan is now firmly in place and we have made major progress towards delivering the anticipated savings we have previously shared with you.
Speaker 4: Finally, we exited 2022 having moved forward on all key strategic initiatives and our 2023 agenda is now freshly prioritized and closely aligned to the growth opportunities we see for our brand. As a consequence, we feel extremely confident about our prospects.
Speaker 4: our ability to harvest the potential this brand clearly has. Now Tyler will provide a more detailed financial update.
Speaker 4: Thanks, Dirk. Overall, we are pleased with our financial results for the quarter with growing sales momentum and improving margins. We are very excited to see strong comparable restaurant sales growth in the fourth quarter of 11% versus 2021 despite the impact of the hurricanes in the first half of the quarter, which we estimate reduces comparable sales.
Speaker 5: by approximately 60 basis points. Our momentum continued into January with comparable restaurant sales of 10.2%. The most encouraging news on our sales trend is clearly our improvement in comparable transaction trends, which were positive in January 2023, compared to January 2022, and have continued into fiscal.
Speaker 5: February month to date. Regarding sales performance, total revenues increased 9.3% to $97.6 million in the fourth quarter of 2022 from $89.3 million in the fourth quarter of 2021. Driven by the comparable restaurant sales increase in...
Speaker 5: partially offset by the impact of the hurricanes, estimated at approximately 0.5 million.
Speaker 5: Fourth quarter improvement compared to 2021 resulted from a 16.3% increase in the net impact of product channel mix and pricing and a decrease in comparable restaurant transactions of 5.3% including approximately 0.5% due to the impact of the hurricanes.
Speaker 5: Fourth quarter 2022 positive mix impact was driven by the addition of check building higher ticket menu items such as pork chunks, the grill master trio, and Turosco protein items, as well as the continued success of check accretive limited time offers, including the return of ribs in the fourth quarter. The fourth quarter 2022 net loss was 4.1.
8 cents per diluted shares, compared to an adjusted net loss of 4.3 million or 17 cents per diluted shares in the fourth quarter of 2021. Please see the non-GAAP reconciliation table in our earnings release for more details.
Consolidated adjusted EBITDA, a non-GAAP financial measure, grew to $6.9 million and 7.1 percent of total revenue in 2022 compared to $2.5 million and 2.8 percent of total revenue in 2021. Washington decades how you did that
Loss from operations was 4.4 million or 4.5% of restaurants sales in the fourth quarter of 2022 compared to a loss from operations of 7.1 million or 8% of restaurants sales in the fourth quarter of 2021.
Turning to restaurant level results, restaurant level operating profit margin, formerly restaurant level adjusted EVA to margins, and a non-GAAP measure was 16.2% in 2022 compared to 14.3% in 2021. Garlic-
The restaurant-level operating profit margins increased during the fourth quarter compared to 2021, primarily due to the impact of higher restaurant sales driven by higher pricing and lower special incentive pay partially offset by higher commodity costs and repairs and maintenance costs. We were pleased with our margin growth in the quarter compared to 2021, as well as our margin growth in the quarter compared to 2021.
percent in 2021 due to higher commodity costs and sales max partially offset by our phase, many price increases and improvements due to operational efficiencies.
Restaurant wages as a percentage of net sales decreased to 25% in the fourth quarter of 2022 from 27.9% in 2021, driven primarily by lower special incentive and bonus pay partially offset by the impact of higher wage rates.
Other restaurant operating expenses as a percentage of restaurant sales increased in the fourth quarter compared to 2021 due primarily to the impact of higher repair maintenance costs, higher utility costs, and higher property and general liability insurance costs.
General and administrative expenses increased to $15.1 million for the fourth quarter of 2022 from $12.7 million for the fourth quarter of 2021 due primarily to the higher employee and other support costs.
General and administrative expenses for the fourth quarter of 2022 included $3.5 million in nonrecurring expenses comprised of $1.6 million of general and administrative efficiency initiative costs including $1.3 million for accelerated charges related to the deferred implementation and service contract costs related to our current accounting system.
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Turning now to cash flow related comments. In the fourth quarter of 2022, our total cash balance decreased 10.4 million from the third quarter of 2022 to 35.8 million, including 3.6 million of restricted cash. Capital expenditures in the fourth quarter of 2022 were 6.4 million, and we also made final payments related to our accounting system.
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 as part of the loan agreement we executed in 2020.
We are making progress finalizing the settlement of the 2021 winter storm insurance claim we noted previously and expect a resolution in the first half of 2023.
In addition, we expect to file insurance claims associated with the impacts of the 2022 hurricanes upon completion of our final assessment of damages and losses.
Regarding investment performance, our refresh remodel program is generating consistent sales lift in comparison to Puyo Topka local market unit restaurant sales trends.
And we completed 32 refreshes and remodels through the end of the fourth quarter. Refreshes are realizing an average lift of 4 percent, with remodels realizing an even higher average lift. In antype of Personality, one of the red areas will be the grandparents.
I'll close with a few comments on our outlook for 2023. We are encouraged by our sales momentum in 2022 that it continues to accelerate in January 2023.
We are very focused on achieving our growth objectives through our four key growth themes.
We expect the sales benefits will continue to build momentum as we realize the full impact of those initiatives.
Our outlook for food and labor costs is for continued inflation in 2023, but more moderated than inflation pressure we saw in 2022. The pricing action of 4% that we took in September 2022 should more than offset anticipated ongoing inflation in 2023.
As a result, we expect our additional pricing action planned for March 2023 to result in margin improvement on a run rate basis above Q4 2022 margin levels.
We are targeting restaurant level margins in 2023 of 18% on a run rate basis through the combination of our continuing transaction growth and additional pricing action, barring any unforeseen changes in our cost structure and operating environment. We expect 2023 DNA expense to decline vs 2022.
which will meaningfully contribute to the ultimate reduction in GNA to the targeted range of 8.5-9% of restaurant sales.
Regarding capital expenditures, we project full year 2023 capital expenditures to be in the range of $22 million to $28 million. In closing, we demonstrated strong sales growth as well as ongoing margin improvement in the fourth quarter, which we expect to continue as we build on the momentum of our strategic growth initiatives. Thank you for listening, and we will now open the call for questions. Operator.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
To withdraw your question, please press star then 2.
At this time, we'll pause momentarily to assemble our roster. Our first question comes from Edward Riley from EF Hutton. Please go ahead.
Hey guys, just curious about the price hike in March. I'm wondering if you're able to quantify that and maybe share if you have any other plans to increase prices throughout the rest of the year. Yeah, thanks. Thanks Eddie. It's Dirk here. So
We're expecting a low to mid single-digit increase. We're still firming that up, but as it relates to the balance of the year, we're going to evaluate additional pricing action based on competitive benchmarking, as we mentioned….
in our prepared remarks. We've been served very well by benchmarking the competitive set and we feel really comfortable that we can make the price move that we're contemplating this month while still maintaining value perceptions. So...
And that pricing action that we're taking in March combined with the pricing action that we took in September well offsets the cost increases that we are anticipating in 23 and actually will accrete margins. So we expect a margin pick up as a result of that phase pricing action that I just mentioned.
Okay, it's also nice to see transaction growth picking up again. Is that also in the mid-single-digit range or so? I'm sorry, Eddie.
Yeah, can you repeat that question, please? I apologize. Yeah, sure. Just on the transaction growth beginning in 2023.
Is that growing in mid-single digits as well? I'm wondering if you could maybe quantify that for me a little bit.
Sure, I mean it was up modestly in January , so in the release it was just it was up slightly 20 basis points. In February , our fiscal February is not over yet, and so we cannot, we can't disclose the run rate, but it's favorable relative.
to January so far, month to day. We actually are finishing the month out this week, and so still have a few days left in our fiscal February , but the trend is definitely better and we're building momentum. Okay, and last one for me on G&A efficiencies. You mentioned, you mentioned, you mentioned, you mentioned,
end of the fiscal year or should we maybe anticipate no eight and a half percent to nine percent of sales a bit sooner than that.
So, I mean, we are absolutely expecting...
meaningful year-over-year reductions in 23. So 23 against 22, we are going to see a significant reduction. So our percentage of, GNAIDS, the percentage of sales we expect to be declining over time as the benefits of the initiatives that we mentioned really hit their...
hit their full impact. Sometime between late 23 and early 24, we expect to hit that run rate. We actually have to, there are a couple initiatives that will not be fully implemented until 24, so we won't get the full benefit of
certain initiatives until early 24.
Okay, great. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Dirk Montgomery for any closing remarks.
No closing remarks and thanks everyone for joining.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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