Q2 2019 Earnings Call
Good afternoon, and welcome to the S. <unk> restaurant group incorporated second quarter 2019 earnings Conference call.
Todays conference call is being recorded.
This time all participants are in they listen only mode. Following the presentation, we will conduct a question and answer session.
Instructions will be provided for you at that time to queue up for a question.
I would now like turn the call over to Rafael <unk> gross managing director at high CR.
Good afternoon, everyone seems to restaurant group's second quarter 2019 earnings release was issued after the market close today. If you have not already access that it can be found on the company's website www dot f., our G.I. dot com under the Investor Relations section.
Before we begin I'd like to inform you that during the call today. 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 operations business strategy budget projected costs and plans and objectives of management for future operations actual outcomes and results may differ materially from what is expressed or forecasted in such 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 actual results to differ materially from those expressed or implied by the forward looking statements can be found in the Companys stcs filings.
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 today are president and Chief Executive Officer, Rich stock injure and Chief Accounting Officer, and interim Chief Financial Officer, Sherry Kinda and now I will turn the call over to rich. Thank you Ray.
Starting with oil tropical comparable restaurant sales fell 1.3% during the second quarter.
That said our sales metric matched the black box benchmark index, and our transactions metric outperformed the black box benchmark index in the markets in which we operate.
Sales were strongest for restaurants outside of our core South Florida market.
As was the case in the first quarter restaurants in our core South, Florida markets and particularly in Broward County were negatively impacted by cannibalization from new development.
Along with increased competitive intrusion.
We continue to believe however that the overall impact of these newly developed location provides positive sales momentum within the market.
Notwithstanding the cannibalization effect and for the business overall as it enables us to enhance the guest experience.
Outside of the core we are experiencing noticeable improvement in sales and margins. This is particularly the case in the 21 restaurants, we operate within Orlando market.
Comparable restaurant sales and transactions in Orlando market increased 7.3% and 5.8% respectively. During the second quarter.
This was 760 950 basis points better than black box fast casual industry peer comparable restaurant sales and transactions respectively.
[noise], we believe coils ability to outperform the benchmark index with respect to transactions was a direct result of the popularity of our everyday value platform for your time.
Which includes three dollarsninety nine a one quarter chicken meal on lunch weekdays.
599, when have chicken meal on dinner weekdays and 12 99 original family meal on weekends.
Our primary marketing activity during the quarter supported portal time, specifically this marketing initiative featured a TV campaign with real guess testimonials and emphasize the freshness and quality of our chicken ingredients and recipes.
We are excited to implement a variety of new product innovations in the third quarter. These include new Cuban sandwiches available with 24 hour citrus marinated grilled chicken.
Or foils famous roast pork.
Fresh 24 hour citrus marinated chicken wings.
Ethanol is filled with nutella, a new honey lime chopped salad and the return of terrestrial stake into stones.
Delicious crispy complement to any pull tropical light menu item or family now.
Our microbial digital loyalty program continues to gain traction with over 165 members at the end of June as we actively promote the program using digital and social media in restaurant, PLP and sign ups that local store marketing events.
Yes, there are encouraged to download our app to earn redeemable points to stay informed and real time of special offers reserved for these members. However for those who do not want to download a rep. We offer them the joint or E Mail club, which functions. The same as our digital App and has grown to over 539000 members. We are very encouraged by this adoption rate as it will ultimately allow us to accumulate and analyze our guest preferences and purchasing practices and in turn better target marketing efforts in order to provide guests more customized until that experience.
Interesting.
Our research tells us that millennials rate was higher than non millennials on MPS scores at both brands.
We view this as a strong opportunity that focus considerable efforts and initiatives related to appealing to the millennials through digital channels and on social media.
These include working with our digital partners to develop programs that specifically identify and target. These guests within our markets to take advantage of this identified opportunities.
[noise] on catering.
We are making headway in positioning ourselves as a compelling b to b and B to C option, we have invested in additional infrastructure, including catering hub units and new delivery vehicles to make sure. Our catering offering maintains the same delicious fresh flavorful food offerings that we are known for within our restaurants.
In early July we launched our new catering menu, which is better aligned with our retail menu.
Our parties by oil platform.
Places greater emphasis on party platters of various sizes designed to meet the need of any form of family or search social gatherings. Additionally, we lowered the prices on our catering menu to improve appeal to a broader audience. While this program is still in its early innings, we're excited with the opportunities for catering program going forward.
Now, let's turn to delivery as you already know jordache that delivery is available at all coil locations delivering oil is still in its infancy, representing only about 2% of our total sales and we believe comes primarily as a transfer from driver.
That said, we believe that over time, there is an upside to reach 10 or even 15% of sales based upon what we are seeing in the industry.
And given that our food travels so well, we expect such sales to become increasingly incremental.
Still we need to be mindful of additional costs related to delivery and therefore have recently begun increasing menu prices for orders placed through door dash.
Operationally the Pos tablets that we rolled out last quarter continued to improve our drive speed of service and guest interaction at our restaurants.
And we will be we will begin testing kiosk ordering as well to further improve our in store order efficiency.
Lastly on Remodels, we will be spending approximately $3 million to remodel between 10 and 13 restaurants in the second half of 2019 to better match.
Their interior to our food quality these projects have large.
Largely just begun and will.
We'll provide further updates in the coming quarters.
With that let's turn our attention to Taco Cabana.
At Taco Cabana comparable restaurant sales fell, 3%, which is similar to black box fast casual industry peer comparable restaurant sales declines in the markets in which we operate as Jerry will discuss later.
We believe the decline in comparable restaurant sales is partially attributable to the unusually heavy rain storms in Texas during the second quarter, which is especially impacted our patio business.
Despite these said setbacks, we're making headway with the various business initiatives that we discussed on our last call.
Again, all these initiatives are being supported by impactful digital media and traditional marketing.
Starting with tacos menu offerings, our focus will continue to be on value promotions and everyday value offerings. However, we are excited to share a new product innovations in the third quarter, including beyond Miep offerings, Carnitas and cornea SATA offerings as I mentioned in the past another margin driver Taco is our alcohol sales and during the second quarter, we launched a gold Margarita maybe would solve the goal to Cuba in conjunction with a week long celebration of Cinco de Mayo as well as our new Bacardi gold rum runner beverage. Additionally, we are testing several new alcohol beverages.
Including a Sofia Hittite to a blue Margarita, which is on the rocks are frozen Sangrias world and six young pitchers of beer Margaritas. We also have other new beverages in development.
The Mrcc loyalty program now has over 163000 members using our loyalty App and 322000 members on our email program.
We see higher average check for loyalty members compared to the system and to that end. We will continue to aggressively promote my Tc program to encourage membership.
As with coil, we look forward to accumulating in analyzing our customers purchasing habits and preferences to better target, our marketing efforts and tailor our offerings in the future.
Turning to delivery door. That's delivery service has remained at approximately 1.5% of sales during the second quarter again similar to plateau.
To offset delivery costs, we are developing a new delivery menu with increased prices.
We're also repositioning tacos catering program to be a compelling option for both b to B and B to C customers.
To that end, we are launching a new catering menu with lower prices, which is better aligned with our retail menu to bolster our offering of delicious fresh flavorful food for any business or social occasion.
In summary for yes experienced some challenges during the second quarter, but we continue to make progress against our planned initiatives for this year.
We are keeping our menus fresh through ongoing innovation.
Marketing, our freshness through traditional and digital channels growing my foil and Mike Tc loyalty and E club programs strengthening our relationship with orders for delivery services, developing menus and offerings for realizing catering opportunities and improving our four wall operational efficiency.
These efforts form the foundation of our sales growth platform in the years to come.
With that let me turn the call over to Sherry to go through our financials in greater detail.
Thank you rich and good afternoon, everyone.
Our second quarter results were muted in part by the negative impact of higher rent expenses in 2019, as a result of the new lease accounting standard.
Absent this change and despite negative comparable restaurant sales, our consolidated adjusted EBITDA margin and non-GAAP measure is comparable to the year ago period.
Total revenues decreased 3.1% from the prior year period, the 171.4 million due primarily to comparable restaurant sales declined that both oil and Taco and restaurant closures in 2018, as we operated 10 fewer locations at the end quarter end versus the year ago period.
Comparable restaurant sales at polio decreased 1.3% compared to a 3.4% increase in the second quarter last year.
This year's decline consisted of a 1.8% decrease in comparable restaurant transactions and a 0.5% increase in average check inclusive of 1.5% in pricing and the impact of lower price, probably a time offerings.
As rich mentioned sales cannibalization from new restaurants on existing restaurants negatively impacted comparable restaurant sales by approximately 120 basis point.
Well clearly tropical comparable restaurant sales matched black box fast casual industry peer comparable restaurant sales in the markets in which we operate transactions are approximately 240 basis points higher.
At Pollo restaurant level adjusted EBITDA, a non-GAAP measure as defined in our SEC filings decreased 5.8 million because of a point 4 million increase in rent expense due to the adoption of the new lease accounting standard and lower restaurant sales.
The new lease accounting standard had a significant impact on our results of operations, because we had $18.6 million in deferred sale leaseback gains from which we will no longer receive a benefit to rent expense.
Prior to adopting the new lease accounting standard, we amortized deferred sale leaseback gains as a reduction to rent expense.
We also have a number of closed restaurants for which we had previous reserves and would not have recognize current period expense under the previous accounting standard.
This reserve was recorded as an adjustment to the right of use asset when we adopted the new lease accounting standard and rent expense related to close restaurants is now recognized each period.
Restaurant level adjusted EBITDA margins at polio decrease compared to the prior year by 20 basis points to 23.1% as a result of the 40 basis point negative impact of the new lease accounting standard and other changes in operating margins.
More importantly, absent the negative impact of lease accounting changes restaurant level adjusted EBITDA margins would have improved compared to the year ago period, driven by lower cost of sales, partially offset by higher labor costs and other operating expenses as a percent of restaurant sales.
Comparable restaurant sales at Taco Cabana decreased 3% compared to a 3.1% increase in the second quarter last year.
This year's decline consisted of a 3.1% increase in average check inclusive of 2.8% and pricing offset by 6.1% decrease in comparable restaurant transactions.
Taco Cabana comparable restaurant sales were approximately 10 basis points lower than black box fast casual industry peer comparable restaurant sales in the markets in which we operate and transactions were approximately 60 basis points lower.
However, we believe the negative weather comparisons, we experienced were particularly impactful to our patio business.
At Taco Cabana restaurant level adjusted EBITDA, a non-GAAP measure as defined in our SEC filings decreased by 1.2 million, primarily due to a point 5 million increase in rent expense due to the adoption of the new lease accounting standard lower sales and higher advertising expenses as a percentage of restaurant sales.
This was partially offset by lower labor cost as a percentage of restaurant sales.
As a percentage of restaurant sales restaurant level, adjusted EBITDA margin decreased by 110 basis points to 12.1%, including a 60 basis point negative impact of the new accounting standard.
During the quarter consolidated adjusted EBITDA, a non-GAAP measure defined in our SEC filings decreased by 1.4 million to 18.8 million, primarily due to the impact of the new lease accounting standard, which negatively impacted consolidated adjusted EBITDA of 5.8 million as well as the impact of lower sales.
In addition, during the quarter, we recorded a 46.5 million non cash impairment charge to write down the value of goodwill for the Taco Cabana reporting unit prior to the write down the carrying value of goodwill for Taco Cabana was 67.2 million.
Net loss was 43.4 million or $1.62 per diluted share in the second quarter of 2019, which includes an unfavorable impact of a $1.73 per diluted share related to the noncash impairment of goodwill compared to net netting kind of 9.5 million or 35 cents per diluted share in the second quarter of 2018.
Adjusted net income another non-GAAP measure was 5.7 million or 21 cents per diluted share and would have been two cents per diluted share higher in the second quarter of 2019 absent the lease accounting changes.
This compares to adjusted net income of $6.8 million or 25 cents per diluted share in the second quarter of 2018.
Please see the non-GAAP reconciliation table in our earnings release release for more details.
Turning to development capital expenditures, we maintain our plan to open three restaurants employ traffic cow and three restaurants at Taco Cabana with capital expenditures expectations of 45 million to 55 million.
So far through the end of the second quarter, we've opened one point, a tropical restaurant and South, Florida, and three Taco Cabana restaurants in Texas.
Our Capex range includes 12 million to 15 million to develop new company owned restaurants, 10 million to 12 million to implement IP and other systems projects and $1 million in catering equipment.
In addition, we are also planning to invest 16 million to $18 million for restaurant remodeling at both brands, including equipment. This important new menu platforms. Another facility enhancements as well as 9 million to 11 million for capital maintenance.
As we mentioned in our press release, we made payments to reduce our outstanding borrowings under our credit facility by 21 million to 61 million, which is 17 million lower than the balance at the end of 2018.
Finally, we announced an increase to our share repurchase program of an additional 500000 shares of common stock.
As a reminder, we previously announced plans on February 26, 2018 to repurchase up to one and a half million shares of common stock.
We had already purchased 270627 shares of common stock under the share repurchase program and following the increased approximately 1.7 million shares of common stock are available for purchase.
The number of shares repurchased in the timing of repurchases will depend on a number of factors. The program also has no time limit maybe modified suspended superceded or terminated at any time by the board of directors.
Thank you for your interest in Fiesta restaurant group and we will now open the line for questions.
Operator.
At this time, we'll be conducting a question answer session. If you would like to ask a question. Please press star one under telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing mr. Keith one moment, please while we pull for questions.
Our first question is from will Slabaugh of Stephens incorporated.
Please proceed with your question.
Thank you I had a question on polio first.
What do you think it takes to get full year in particular back to its historically consistent outperformance to not only the core mortgage where I know you are roughly in line, but also the industry, which which was the case for a long period of time.
I think then we'll how are you. It's rich I think first of all if you look at oil versus our because of the blackout blackbox metrics, we're beating our competitors in the market, where we are this definitely isn't 50 geographics. So she had geographic impact of some areas, especially in core is not as favorable today as it once was back in the heyday.
Second I do believe no just starting the catering program has a huge impact or potential impact for us. The loyalty program, which is again just started we shouldn't have another huge impact for us, which we currently do.
Just starting and third is delivery of which right now is giving zero as compared to our competitors. So I believe we're on our way, yes, we definitely have more competitive intrusion into the market than we did before including which which I consider to be the gold standard against US right now is chick fillet, but we feel we can more than overcome their coming into our market.
By these other vehicles.
And can you talk a little bit more about that competitive intrusion is it is it primarily cheerfully you're referring to are there other competitors that you would name out or.
Yes, there are others, but.
As recently as today and announced by several people.
Chick Fil a is is definitely the formidable competitor coming in and they've identified.
South, Florida, as a market that they're coming in and they are coming into us.
Got it and lastly from me still sticking with polio can you talk about the elements of the polio remodel that you're looking at it and how that might look different and different.
Hi, guys property.
Yes, we are just starting the re positioning project that I've mentioned several times at these calls so its not has nothing to do with that this is purely going to be things that the guests can see.
Hey.
Chairs tables lighting, the buildings et cetera. So we did a lot of work in the back of the house as part of the renewal program deferred maintenance, but this will have none of the elements that will be determined as the repositioning and positioning of the brand.
Got it thank you.
Thank you will.
We have reached the end of the question answer session and this does conclude today's conference.
You may disconnect your lines at this time, thank you for your participation.