Carrols Restaurant Group, Inc. (Nasdaq: TAST) today reported financial results for the third quarter ended September 29, 2019.
Highlights for the Third Quarter of 2019 versus the Third Quarter of 2018 Include:
- Total restaurant sales increased 34.2% to $398.4 million (including $71.6 million in restaurant sales from the Cambridge acquisition completed in the second quarter) from $296.9 million in the prior year quarter;
- Comparable restaurant sales for the Company’s Burger King restaurants increased 4.5% compared to a 1.6% increase in the prior year quarter;
- As described below, the Company realized it had been combining the sales discounts with respect to separate Whopper® value meal promotions between June 3 and August 26, 2019, which resulted in significant additional sales discounts relative to the advertised promotions that reduced restaurant sales by approximately $8.3 million. Excluding the impact of the excess sales discounts, comparable restaurant sales for the third quarter would have increased approximately 7.4%;
- Adjusted EBITDA(1) was $25.6 million compared to $26.5 million in the prior year quarter. The impact of the excess sales discounts above reduced Adjusted EBITDA in the third quarter by approximately $7.3 million. Excluding the impact of the excess sales discounts Adjusted EBITDA in the third quarter of 2019 would have been approximately $32.9 million;
- Net loss was $6.8 million, or $0.15 per diluted share, compared to net income of $3.6 million, or $0.08 per diluted share, in the prior year quarter; and
- Adjusted net loss(1) was $3.9 million, or $0.09 per diluted share, compared to adjusted net income of $4.2 million, or $0.09 per diluted share, in the prior year quarter.
(1) Adjusted EBITDA, Restaurant-level EBITDA and Adjusted net income (loss) are non-GAAP financial measures. Refer to the definitions and reconciliation of these measures to net income (loss) or to income (loss) from operations in the tables at the end of this release.
Daniel T. Accordino, Chairman and Chief Executive Officer of Carrols, commented, “Our comparable restaurant sales growth during the third quarter included the successful introduction of the Impossible™ Whopper®, which has contributed incremental restaurant sales since its launch in August and we believe will continue to positively impact our restaurant sales. The 2 for $6 Mix & Match sandwich platform has also performed consistently well while the $1 Crispy Taco provided a new value offering to the Burger King menu. Although a strong quarter from a comparable restaurant sales perspective, we were negatively impacted by the excess discounts we applied to all Whopper value meals relative to the advertised promotions. As a result, our comparable restaurant sales growth was reduced by approximately 290 basis points and Adjusted EBITDA was reduced by approximately $7.3 million. Excluding this impact, our comparable restaurant sales would have increased in the third quarter by approximately 7.4% and our Adjusted EBITDA would have been approximately $32.9 million. Once these excess sales discounts were identified and removed in our pricing of Whopper value meals, our top line results subsequently improved as our September comparable restaurant sales increased 7.9%. Looking ahead, we believe that Burger King’s marketing calendar will allow us to maintain the momentum we experienced through the end of the third quarter and which continued into October.”
Accordino continued, “Restaurant-level profitability and Adjusted EBITDA during the third quarter were also challenged by higher commodity costs, including a 10.7% increase in beef costs, continued labor rate increases, as well the lower restaurant-level EBITDA margins at the Cambridge restaurants, due largely to the investment in training restaurant staff as part of the integration. We also began installation of our point-of sale systems at the Cambridge Burger King restaurants during the third quarter and expect to have all Burger King restaurants installed by the middle of November. This will be an important step in improving controls over sales and optimizing food and labor costs at these restaurants in 2020. We anticipate the full integration of the Cambridge restaurants will be complete by year end. As has been the case with past acquisitions, the investments we are making in training reduced temporarily restaurant-level profitability at the Cambridge restaurants, however we are confident that we will be able to deliver meaningful value creation from the Cambridge restaurants, as we have done in the past with other acquisitions.”
Accordino concluded, “Longer-term, Carrols’ foundation of two world-class brands with significant scale advantages and a supportive franchisor partner bode well for realizing growth opportunities across multiple attractive markets. We believe we are well positioned to capture growth from two of our recent impactful product innovations, the Impossible Whopper at Burger King and the Popeye’s chicken sandwich.
Third Quarter 2019 Financial Results
Restaurant sales increased 34.2% to $398.4 million in the third quarter of 2019, including $71.6 million in restaurant sales from Cambridge, compared to $296.9 million in the third quarter of 2018. Comparable restaurant sales (which excludes recently acquired restaurants) increased 4.5%, consisting of an average check increase of 2.3%, which included 1.2% of pricing, and an average customer traffic increase of 2.2%.
The Company’s results in both the second and third quarter were significantly impacted by combining the sales discounts with respect to separate Whopper value meal promotions between June 3 and August 26, 2019. The Company removed these excess sales discounts from the pricing of its Whopper value meals in late August 2019 and that action decreased significantly the level of the Company’s promotional sales discounts and increased restaurant sales. The Company had a comparable restaurant sales increase of 7.9% in September.
The excess discounts described above resulted in reduced restaurant sales on all Whopper value meals of approximately $8.3 million in the third quarter of 2019 and approximately $12.4 million for the first nine months of 2019, reduced Adjusted EBITDA of approximately $7.3 million in the third quarter of 2019 and approximately $10.9 million for the first nine months of 2019 and increased the Company’s net loss by approximately $5.5 million in the third quarter and approximately $8.2 million in the first nine months of 2019.
Restaurant-level EBITDA(1) was $43.0 million in the third quarter of 2019 compared to $41.6 million in the prior year period. Restaurant-level EBITDA margin was 10.7% of restaurant sales and decreased 330 basis points from the third quarter of 2018, reflecting the excess sales discounts described above, as well as higher cost of sales including a 10.7% increase in beef costs, and higher wage and related expenses, rent expenses, and other operating expenses, which reflect the impact of the lower margin Cambridge restaurants.
General and administrative expenses were $21.4 million in the third quarter of 2019, including $2.2 million in Cambridge acquisition and integration costs, compared to $17.6 million in the prior year period, which included $0.8 million in acquisition costs and integration costs. Excluding acquisition and integration costs in both periods, general and administrative expenses declined 102 basis points to 4.6%, as a percentage of total revenues.
Adjusted EBITDA(1) was $25.6 million in the third quarter of 2019 compared to $26.5 million in the third quarter of 2018. Adjusted EBITDA margin decreased 250 basis points to 6.4% of restaurant sales due to the factors discussed above.
Loss from operations was $1.1 million in the third quarter of 2019 compared to income from operations of $9.7 million in the prior year period.
Interest expense increased to $7.6 million in the third quarter of 2019 from $5.9 million in the third quarter of 2018, reflecting the Company’s higher indebtedness.
Net loss was $6.8 million in the third quarter of 2019, or $0.15 per diluted share, compared to net income of $3.6 million, or $0.08 per diluted share, in the prior year period. Net loss in the third quarter of 2019 included $0.5 million of impairment charges and other lease charges and $2.8 million of integration expenses. Net income in the third quarter of 2018 included $0.2 million of impairment and other lease charges and $0.8 million of acquisition expenses.
Adjusted net loss(1) was $3.9 million, or $0.09 per diluted share, compared to adjusted net income of $4.2 million, or $0.09 per diluted share, in the prior year quarter.
Carrols repurchased 283,069 shares of its outstanding common stock in open market transactions during the third quarter of 2019 under the $25 million stock repurchase program that was approved by the Board of Directors in early August 2019. The Company has no obligation to repurchase stock under this program, and the timing, actual number and value of shares purchased will depend on the stock price, trading volume, general market and economic conditions, and other factors.
With regard to liquidity, we ended the third quarter with $2.6 million of cash and long-term debt and finance lease liabilities of $486.5 million. At the end of the third quarter we had availability under our revolving credit facility of $53.9 million. Our net leverage ratio was approximately four times Consolidated EBITDA as defined in our Senior Credit Facility.
Full Year 2019 Outlook
Carrols is revising its annual guidance for certain items to reflect the following. These estimates exclude any other potential acquisitions that the Company may complete in 2019:
- Total restaurant sales are still expected to be $1.44 billion to $1.47 billion, including approximately $200 million of total sales from Cambridge for approximately eight months in 2019;
- Comparable restaurant sales are still expected to grow 2.0% to 3.0%;
- Commodity costs are still expected to increase 3% to 4% with beef costs increasing 7% to 9%;
- General and administrative expenses are still expected to be $68 million to $72 million, excluding stock compensation expense and acquisition and integration costs. The Company expects to fully integrate the Cambridge corporate functions by the end of the year;
- Our previous guidance of Adjusted EBITDA of $100 million to $105 million remains unchanged other than for the negative impact on Adjusted EBITDA of approximately $10.9 million in the second and third quarters due to the excess sales discounts discussed above;
- Capital expenditures are now expected to be $145 million to $155 million (previously $120 million to $130 million), including $55 million to $65 million for construction of 22 to 24 new Burger King restaurants and 9 to 11 new Popeyes restaurants and remodeling approximately 92 Burger King restaurants and 4 Popeyesrestaurants. The Company will be receiving $8 million of landlord contributions for certain of the 2019 Burger King remodels in 2020;
- Proceeds from sale/leasebacks are now expected to be approximately $44 million to $48 million (previously $15 million to $25 million);
- The Company expects to close up to 15 Burger King® restaurants, including two restaurant relocations within their trade areas, which 13 have been closed through the end of third quarter of 2019.
Carrols has not reconciled guidance for Adjusted EBITDA to the corresponding GAAP financial measure because the Company does not provide guidance for net income or for the various reconciling items. The Company is unable to provide guidance for these reconciling items since certain items that impact net income are outside of Carrols’ control or cannot be reasonably predicted.
About the Company
Carrols is one of largest restaurant franchisees in the United States, and currently operates 1,093 restaurants. It is the largest BURGER KING® franchisee in the United States currently operating 1,032 BURGER KING® restaurants and also operating 61 POPEYES® restaurants. It has operated BURGER KING® restaurants since 1976.
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