Carrols Restaurant Group, Inc. Reports Financial Results for the Fourth Quarter and Full Year 2019

Carrols Restaurant Group, Inc. (Nasdaq: TAST) today reported financial results for the fourth quarter and full year ended December 29, 2019.

Highlights for the Fourth Quarter of 2019 versus the Fourth Quarter of 2018 Include:

• Total revenue increased 30.3% to $401.1 million (including $73.6 million in restaurant sales and $3.4 million in other revenue from the Cambridge acquisition completed in the second quarter of 2019) from $307.8 million in the prior year quarter;
• Comparable restaurant sales for the Company’s Burger King restaurants increased 2.0% compared to a 2.7% increase in the prior year quarter, an increase of 4.7% on a two-year stacked basis;
• Comparable restaurant sales for the Company’s Popeyes restaurants increased 21.2% compared to comparable restaurant sales under previous ownership in the prior year quarter;
• Promotions and discounts were 19.0% of restaurant sales for the Company's comparable Burger King restaurants compared to 26.6% in the prior year quarter;
• Adjusted EBITDA⁽¹⁾ was $22.7 million compared to $24.5 million in the prior year quarter;
• Net loss was $9.9 million, or $0.20 per diluted share, compared to net income of $1.8 million, or $0.04 per diluted share, in the prior year quarter; and
• Adjusted net loss⁽¹⁾ was $6.2 million, or $0.12 per diluted share, compared to adjusted net income of $2.5 million, or $0.05 per diluted share, in the prior year quarter.

Highlights for Full Year of 2019 versus Full Year of 2018 Include:

• Total revenue increased 24.0% to $1.46 billion (including $193.1 million in restaurant sales and $10.2 million in other revenue from the Cambridge acquisition completed in the second quarter of 2019) from $1.18 billion in 2018;
• Comparable restaurant sales for the Company’s Burger King restaurants increased 2.2% compared to a 3.8% increase in 2018, an increase of 6.0% on a two-year stacked basis;
• Comparable restaurant sales for the Company’s Popeyes restaurants increased 11.9% for our eight months of ownership compared to comparable restaurant sales under previous ownership in the prior year;
• Adjusted EBITDA⁽¹⁾ was $86.1 million compared to $103.0 million in 2018;
• Net loss was $31.9 million, or $0.74 per diluted share, compared to net income of $10.1 million, or $0.22 per diluted share, in 2018; and
• Adjusted net loss⁽¹⁾ was $15.5 million, or $0.36 per diluted share, compared to adjusted net income of $14.1 million, or $0.31 per diluted share, in 2018.

Daniel T. Accordino, Chairman and Chief Executive Officer of Carrols, commented, “2019 was a busy year at Carrols characterized by significant accomplishments and challenges. We substantially increased our restaurant sales and broadened our restaurant portfolio from 849 restaurants in 18 states at the end of 2018 to 1,101 restaurants in 23 states at the end of 2019, mostly through the transformative Cambridge acquisition. In addition, the transaction added a second brand to Carrols in Popeyes, which we believe has tremendous potential. During 2019, we also built 31 new restaurants and remodeled 78 restaurants. However, comparable restaurant sales growth for our Burger King restaurants was at the low-end of our annual expectations and full year Adjusted EBITDA relative to 2018 levels was adversely affected by several factors, including increases in commodity and labor costs and the excess sales discounts to certain customers over a ten week period last summer.”

Accordino continued, “We begin 2020 with great optimism regarding our growth trajectory for restaurant sales and Adjusted EBITDA. Our top-line will benefit from a full year of contributions from the restaurants we acquired, remodeled and built during 2019 and early 2020. We are projecting a 2% to 3% gain in comparable restaurant sales in 2020 for our Burger King restaurants based upon the brand’s marketing initiatives and product roll-out schedule, and adding delivery capabilities by the end of the second quarter. We also foresee higher Adjusted EBITDA and margin improvement compared to 2019. We believe this will be driven by expected improvements at our Cambridge restaurants as we continue to implement our operational best practices, improve operating controls over sales, and optimize food and labor expenditures. Coupled with executing on a near term plan to drive efficiencies in our business, our goal is to meaningfully expand margins over time.”

Accordino concluded, “In terms of our 2020 plans, in consultation with our board of directors we have reset our strategy to prioritize organic sales and margin growth within our current restaurant portfolio and to aggressively reduce our capital spending compared to 2019. We anticipate that projected net capital expenditures in 2020 will be approximately $55 million to $65 million, considerably lower than our approximately $98 million of net capital expenditures in 2019. We are laser-focused on capital allocation and will only invest capital in the highest return projects. Our franchisor is in full agreement with our 2020 planned reduction in restaurant remodel and build levels. This year our objective is to generate positive free cash flow through higher EBITDA and reduced net capital investment which we plan to deploy to reduce both our outstanding debt on an absolute basis and debt leverage ratio by year end.”

Fourth Quarter 2019 Financial Results

Total revenue increased 30.3% to $401.1 million in the fourth quarter of 2019, including $73.6 million in restaurant sales from Cambridge, compared to $307.8 million in the fourth quarter of 2018. Comparable restaurant sales for the Company’s Burger King restaurants (which excludes restaurants acquired in 2019) increased 2.0%, consisting of a higher average check partially offset by a decrease in customer traffic. This dynamic was a function of substantially lower promotions and discounts as a percentage of restaurant sales for the Company’s comparable Burger King restaurants. Comparable restaurant sales for the Company’s Popeyes restaurants increased 21.2% compared to comparable restaurant sales under previous ownership in the prior year quarter.

Adjusted Restaurant-level EBITDA⁽¹⁾ was $42.9 million in the fourth quarter of 2019 compared to $39.5 million in the prior year period. Adjusted Restaurant-level EBITDA margin was 10.8% of restaurant sales and decreased 200 basis points from the fourth quarter of 2018, reflecting higher wage and related expenses at our legacy restaurants and the inclusion of rent and other operating expenses from the lower margin Cambridge restaurants.

General and administrative expenses were $23.0 million in the fourth quarter of 2019, including $1.5 million in Cambridge acquisition and integration costs, compared to $16.8 million in the prior year period, which included $0.4 million in acquisition and integration costs. Excluding acquisition and integration costs in both periods, general and administrative expenses increased modestly to 5.4% as a percentage of total revenues from 5.3% in the prior year quarter and reflects the costs attributed to a larger initial scope of required oversight due to the expanded restaurant base.

Adjusted EBITDA⁽¹⁾ was $22.7 million in the fourth quarter of 2019 compared to $24.5 million in the fourth quarter of 2018. Adjusted EBITDA margin was 5.7% of total restaurant sales and decreased 220 basis points from the fourth quarter of 2018 due to the factors discussed above.

Loss from operations was $4.6 million in the fourth quarter of 2019 compared to income from operations of $7.2 million in the prior year quarter.

Interest expense increased to $7.4 million in the fourth quarter of 2019 from $5.9 million in the fourth quarter of 2018, reflecting the Company’s higher outstanding indebtedness.

Net loss was $9.9 million in the fourth quarter of 2019, or $0.20 per diluted share, compared to net income of $1.8 million, or $0.04 per diluted share, in the prior year quarter. Net loss in the fourth quarter of 2019 included $1.8 million of impairment and other lease charges compared to $0.3 million in the fourth quarter of 2018.

Adjusted net loss⁽¹⁾ was $6.2 million, or $0.12 per diluted share, compared to adjusted net income of $2.5 million, or $0.05 per diluted share, in the prior year quarter.

Carrols repurchased 270,043 shares of its outstanding common stock in open market transactions during the fourth quarter of 2019 at a cost of approximately $2.0 million. Under the $25 million stock repurchase program that was approved by the Board of Directors in August 2019, the Company has repurchased a total of 553,112 shares for a total cost of approximately $4.0 million. 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.

The Company ended the fourth quarter of 2019 with cash of $3.0 million, and long-term debt, finance lease liabilities and lease financing obligations of $472.3 million, and availability under its revolving credit facility of $57.6 million. Carrols’ First Lien Net Leverage Ratio, as defined in the Company’s Senior Credit Facility, was approximately 4.11x at December 29, 2019 compared to a maximum permitted of 5.75x. On February 24, 2020, $70.8 million of borrowings were outstanding on the Company’s $115 million revolving credit facility and $11.7 million of letters of credit were outstanding. This represents an elevated level of borrowing as during the first two months of the year we funded carryover capital expenditures and working capital payables from 2019 while we typically generate the lowest level of revenue and earnings during this time of the year. We expect revolver borrowing levels to decline during the second and third quarters of 2020.

2020 Growth and Capital Allocation Strategy

In consultation with our Board of Directors, we have reset the Company’s growth and capital allocation strategy. In 2020, Carrols will prioritize organic sales and margin improvement within our current restaurant portfolio and aggressively reduce capital spending compared to 2019 levels. These measures are designed to generate free cash flow and reduce our debt in absolute dollars as well as our debt leverage ratios.

We will accomplish our objectives through the following steps:

• Slowing down the pace of acquisition activity;
• Limiting new restaurant development in 2020 to six new Burger King restaurants with attractive expected returns on capital. We also are completing the new build of six Burger King restaurants during the first quarter of 2020 that were started in late 2019. In total, we will be opening 12 new Burger King restaurants in 2020 (by comparison we opened 21 Burger King restaurants and 10 Popeyes restaurants in 2019);
• Reducing our remodeling activity in 2020 to just 12 Burger King restaurants with high returns on capital (by comparison, we remodeled 74 Burger King restaurants and 4 Popeyes restaurants in 2019); and
• Taking a renewed look at operating expenses across the expanded business with the goal of creating greater efficiencies and improved margins over time.

Based upon our full year 2020 outlook detailed below, we expect to generate up to $25 million in free cash flow this year assuming neutral working capital changes.

Full Year 2020 Outlook

The Company is providing the following guidance for 2020 which is a 53-week fiscal period:

• We expect total restaurant sales of $1.64 billion to $1.69 billion;
• Comparable restaurant sales growth for our Burger King restaurants owned for more than 12 months as of December 29, 2019 is expected to be 2% to 3%. Please note that the Cambridge Burger King restaurants will enter the comparable base on May 1^st;
• Commodity costs are expected to increase 2% to 3%, with beef costs expected to increase 9%;
• General and administrative expenses are expected to be $80 million to $85 million, excluding stock compensation expense, reflecting the full year impact of overhead costs required to support our enlarged restaurant base;
• Adjusted EBITDA is expected to be $100 million to $110 million;
• Interest expense is expected to be approximately $30 million based on our debt pricing and expected stable LIBOR levels;
• Gross capital expenditures are expected to be $70 million to $75 million, including approximately 35% for maintenance, 15% for remodeling; and 40% for construction of new restaurants. Of that total, approximately $25 million will be expended in the first quarter of 2020 primarily relating to the completion of new restaurants and remodels that commenced in 2019; and
• Proceeds from sale/leasebacks are expected to be approximately $10 million to $15 million; resulting in net capital expenditures of $55 million to $65 million.

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 1,099 restaurants. It is the largest BURGER KING® franchisee in the United States currently operating 1,034 BURGER KING® restaurants and also operating 65 POPEYES® restaurants. It has operated BURGER KING® restaurants since 1976.