Fiesta Restaurant Group, Inc. Reports Second Quarter 2019 Results
Total revenues decreased 3.1% to $171.4 million in the second quarter of 2019 from $176.8 million in the second quarter of 2018
Fiesta Restaurant Group, Inc. (NASDAQ: FRGI), parent company of the Pollo Tropical® and Taco Cabana® restaurant brands, today reported results for the 13-week second quarter 2019, which ended on June 30, 2019.
Fiesta President and Chief Executive Officer Richard Stockinger said, “Comparable restaurant sales for the second quarter mirrored the decline of the benchmark index in our Florida and Texas markets. Comparable restaurant transactions, however, exceeded the benchmark index in Florida due in part to the popularity of our everyday value platform 'Pollo Time'. Pollo Tropical comparable restaurant sales were negatively impacted by roughly 120 basis points due to cannibalization of existing restaurants by new restaurants in our core markets. In these markets, we have opened new restaurants in the proximity of existing units with high sales in order to improve the customer experience and increase overall sales. In essence, sales have been transferred from one Pollo restaurant to another, causing comparable restaurant sales to decline, but as a company we increase our penetration and share. As a whole, we believe this is another sign that our actions to date are positively impacting our guest experience.”
Mr. Stockinger continued, “We are positioning ourselves for sales growth at our existing restaurants through strategic initiatives related to menu innovation and simplification, everyday value platforms, the 'My Pollo' and 'My TC' loyalty and e-club programs, refined catering menus, and our DoorDash partnership. These initiatives are in turn supported by digital, social media, traditional TV, and local marketing which we are utilizing to accentuate our freshness attributes. Our intention for the balance of this year is to generate higher profitability and margins on a consolidated basis, excluding the recent lease accounting changes and non-cash write-off, as we leverage expected favorable commodity costs and prior-year investments. In addition, we are pleased to have reduced outstanding borrowings under our revolving credit facility by $21 million this quarter due primarily to a tax refund. As a result, our outstanding revolving credit facility balance as of June 30, 2019 was $17 million lower than at the end of 2018.”
Mr. Stockinger concluded, “We determined that the sustained decline in our stock price was a triggering event requiring an interim impairment test of goodwill as of June 30, 2019. Based on this interim impairment test, we recorded a non-cash impairment charge to write down the value of goodwill for the Taco Cabana reporting unit. This impairment charge had an unfavorable impact on net income (loss) of $46.5 million or $1.73 per diluted share.”
The Company today announced an increase to its share repurchase program of an additional 500,000 shares of common stock. The Company previously announced plans on February 26, 2018 to repurchase up to 1,500,000 shares of common stock. The Company has purchased a total of 270,627 shares of common stock under its share repurchase program and, following the increase, 1,729,373 shares of common stock remain available for purchase by the Company.
Under the share repurchase program, shares may be repurchased from time to time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The number of shares repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, stock price, trading volume, general market and economic conditions, and other corporate considerations. The share repurchase program has no time limit and may be modified, suspended, superseded or terminated at any time by the board of directors.
Second Quarter 2019 Financial Summary
- Total revenues decreased 3.1% to $171.4 million in the second quarter of 2019 from $176.8 million in the second quarter of 2018;
- Comparable restaurant sales at Pollo Tropical decreased 1.3%;
- Comparable restaurant sales at Taco Cabana decreased 3.0%;
- Net loss of $43.4 million, or $1.62 per diluted share, in the second quarter of 2019, which includes the unfavorable impact of $46.5 million, or $1.73 per diluted share, related to a non-cash impairment of goodwill, compared to net income of $9.5 million, or $0.35 per diluted share, in the second quarter of 2018;
- Adjusted net income (a non-GAAP financial measure) of $5.7 million, or $0.21 per diluted share, in the second quarter of 2019, which includes a $0.02 per diluted share negative impact from adoption of the new lease accounting standard, compared to adjusted net income of $6.8 million, or $0.25 per diluted share, in the second quarter of 2018 (see non-GAAP reconciliation table below);
- Adjusted EBITDA for Pollo Tropical of $14.6 million in the second quarter of 2019 would have been $0.4 million higher absent accounting changes resulting from adoption of the new lease accounting standard, compared to $15.5 million in the second quarter of 2018;
- Restaurant-level Adjusted EBITDA (a non-GAAP financial measure) at Pollo Tropical of $21.4 million, or 23.1% of restaurant sales, in the second quarter of 2019 would have been $0.4 million, or 0.4% of restaurant sales, higher absent accounting changes resulting from adoption of the new lease accounting standard, compared to $22.3 million, or 23.3% of restaurant sales, in the second quarter of 2018 (see non-GAAP reconciliation table below);
- Adjusted EBITDA for Taco Cabana of $4.1 million in the second quarter of 2019 would have been $0.5 million higher absent accounting changes resulting from adoption of the new lease accounting standard, compared to $4.6 million in the second quarter of 2018;
- Restaurant-level Adjusted EBITDA (a non-GAAP financial measure) at Taco Cabana of $9.5 million, or 12.1% of restaurant sales, in the second quarter of 2019 would have been $0.5 million, or 0.6% of restaurant sales, higher absent accounting changes resulting from adoption of the new lease accounting standard, compared to $10.7 million, or 13.2% of restaurant sales, in the second quarter of 2018 (see non-GAAP reconciliation table below); and
- Consolidated Adjusted EBITDA (a non-GAAP financial measure) of $18.8 million in the second quarter of 2019 would have been $0.8 million higher absent accounting changes resulting from adoption of the new lease accounting standard, compared to Consolidated Adjusted EBITDA of $20.2 million in the second quarter of 2018 (see non-GAAP reconciliation table below).
Second Quarter 2019 Brand Results
Pollo Tropical restaurant sales decreased 2.9% to $92.6 million in the second quarter of 2019 compared to $95.4 million in the second quarter of 2018 due primarily to a comparable restaurant sales decrease of 1.3% and 10 fewer restaurants in 2019. Sales cannibalization from new restaurants on existing restaurants negatively impacted comparable restaurant sales by approximately 120 basis points. The decrease in comparable restaurant sales resulted from a 1.8% decrease in comparable restaurant transactions partially offset by a 0.5% increase in average check. The increase in average check was driven primarily by menu price increases of approximately 1.5%.
Pollo Tropical's second quarter 2019 comparable restaurant sales were the same as TDnK's Black Box Intelligence's fast-casual Florida benchmark for the markets in which we operate, while comparable restaurant transactions exceeded TDnK's Black Box Intelligence's fast-casual Florida benchmark for the markets in which we operate by 2.4%.
Adjusted EBITDA for Pollo Tropical decreased to $14.6 million in the second quarter of 2019 from $15.5 million in the second quarter of 2018. Absent the negative impact of the new lease accounting standard, Adjusted EBITDA in the second quarter of 2019 would have decreased by $0.5 million. The decrease was due primarily to a $0.4 million increase in rent as a result of adopting the new lease accounting standard, higher restaurant wages and related expenses as a percent of restaurant sales due to higher wage rates and overtime, higher delivery fees and other operating expenses and the impact of lower comparable restaurant sales, partially offset by lower cost of sales as a percentage of restaurant sales.
Taco Cabana restaurant sales decreased 3.3% to $78.1 million in the second quarter of 2019 from $80.8 million in the second quarter of 2018 due primarily to a comparable restaurant sales decrease of 3.0%. The decrease in comparable restaurant sales resulted from a 6.1% decrease in comparable restaurant transactions partially offset by a 3.1% increase in average check. The increase in average check was due primarily to menu price increases of 2.8% and the introduction of higher priced shareable items.
Taco Cabana's second quarter 2019 comparable restaurant sales were the 0.1% lower than TDnK's Black Box Intelligence's fast-casual Texas benchmark for the markets in which we operate, while comparable restaurant transactions were 0.6% lower than TDnK's Black Box Intelligence's fast-casual Texas benchmark for the markets in which we operate.
Adjusted EBITDA for Taco Cabana decreased to $4.1 million in the second quarter of 2019 from $4.6 million in the second quarter of 2018. Absent the negative impact of the new lease accounting standard, Adjusted EBITDA in the second quarter of 2019 would have decreased by $0.1 million. The decrease was primarily due to a $0.5 million increase in rent as a result of adopting the new lease standard, higher advertising expense and delivery fees and the impact of lower comparable restaurant sales, partially offset by lower restaurant wages and related expenses as a percentage of restaurant sales due to improved labor scheduling that was partially offset by higher wage rates and overtime.
Taco Cabana Goodwill Impairment
As of June 30, 2019, the sustained decrease in the market price of the Company's common stock was determined to be a triggering event requiring an interim impairment test of the Company's goodwill. Based on this interim impairment test, the Company recorded a non-cash impairment charge to write down the value of goodwill for the Taco Cabana reporting unit, which had an unfavorable impact on net income (loss) of $46.5 million or $1.73 per diluted share.
Lease Accounting Change
We adopted Financial Accounting Standard Board ("FASB") Accounting Standard Update ("ASU") 2016-02, Leases (Topic 842) ("ASC 842"), which requires lessee recognition of lease assets and lease liabilities on the balance sheet, as of the beginning of fiscal 2019. The new lease accounting standard, ASC 842, had a significant impact on our results of operations because we had $18.6 million in sale-leaseback gains from which we no longer receive a benefit to rent expense and we have a significant number of closed restaurants for which we had previous closed restaurant rent reserves and would not have recognized current period expense under the previous accounting standard.
As a result of adopting this standard, substantially all previously deferred gains on sale-leaseback transactions were recognized as an adjustment to retained earnings and we will no longer receive the benefit to rent expense from amortizing these gains resulting in higher rent expense being recognized each period over the life of the respective leases. Amortization of deferred gains from sale-leaseback transactions for the three months ended July 1, 2018 totaled approximately $0.4 million and $0.5 million for Pollo Tropical and Taco Cabana, respectively.
Additionally, prior to the adoption of ASC 842, we recorded closed restaurant reserves representing future minimum lease payments and ancillary costs from the date of the restaurant closure to the end of the remaining lease term, net of estimated sublease recoveries, when a restaurant closed, recorded expense related to the accretion of the reserve each period, and recorded subsequent changes in the assumptions related to the sublease income to expense in the period in which the assumptions changed. The subsequent closed restaurant rent payments were recorded as a reduction to the closed restaurant reserves, with no rent related expense being recorded in the period. As a result of adopting ASC 842, these closed restaurant rent reserves were recorded as a reduction to operating lease right-of-use assets, and rent expense (the straight-line amortization of the right-of-use assets and accretion of the lease liability) related to closed restaurants is now included within closed restaurant rent expense, net of sublease income in the condensed consolidated statement of operations each period. The comparative period information has not been restated and continues to be reported under the accounting standard in effect for that period. Closed restaurant rent expense, net of sublease income for the three months ended June 30, 2019 totaled $1.0 million and $0.3 million for Pollo Tropical and Taco Cabana, respectively.
Restaurant Portfolio
During the second quarter of 2019, Fiesta opened one Pollo Tropical in South Florida and one Taco Cabana restaurant in Texas. As of June 30, 2019, there were 140 Company-owned Pollo Tropical restaurants, 165 Company-owned Taco Cabana restaurants, 31 franchised Pollo Tropical restaurants in the U.S., Puerto Rico, the Bahamas, Guyana and Panama and eight franchised Taco Cabana restaurants in the U.S.
Capital Expenditures
Full year capital expenditures in 2019 include opening three new Company-owned Pollo Tropical restaurants in South Florida and three to four new Company-owned Taco Cabana restaurants in Texas. Total capital expenditures in 2019 are expected to be $45 million to $55 million including $12 million to $15 million to develop new Company-owned restaurants, $10 million to $12 million to implement information technology and other systems projects and $1 million in catering equipment. In addition, ongoing reinvestment in our Pollo Tropical and Taco Cabana Company-owned restaurants in 2019 is expected to include $16 million to $18 million for restaurant remodeling, equipment to support new menu platforms and other facility enhancements, and $9 million to $11 million for capital maintenance.
Fiesta Restaurant Group, Inc., owns, operates and franchises the Pollo Tropical® and Taco Cabana® restaurant brands. The brands specialize in the operation of fast casual/quick service restaurants that offer distinct and unique flavors with broad appeal at a compelling value. The brands feature fresh-made cooking, drive-thru service and catering.